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THE  LIBRARY 

OF 

THE  UNIVERSITY 

OF  CALIFORNIA 

LOS  ANGELES 

SCHOOL  OF  LAW 


SUPPLEMENT 

TO 

545 

United  States 
Tax  Cases 


Briefs  of 

Federal  and  State  Cases  on 

Income  Taxes,  Excess  Profits  Taxes, 

AND  Inheritance,  Stamp 
AND  Miscellaneous   Business  Taxes 


RESEARCH,  BRIEFS  AND  COMPILATION    BY 
KIXMILLER   AND   BAAR 

Attorneys  at  Law 


COMMERCE  CLEARING  HOUSE 

SERVICE    OFFICES     IN 
NEW   YORK  WASHINGTON  CHICAGO 


^f 


11. 


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Copyright,  1922 
By  EixMiller  &  Baar 


HILLISON    a    ETTEN   COMPA^^Y 

PRINTERS   AND   BINDERS 

CHICAGO 


FOREWORD 

This  book  is  a  supplement  to  the  original  work  entitled,  "545 
U.  S.  Tax  Cases,"  published  in  1921,  Its  principal  purpose  is  to 
bring  that  work  down  to  date  by  the  addition  of  briefs  of  court 
cases  decided  since  October  1,  1921.  In  a  few  instances  older 
cases,  which  have  been  discovered  during  the  past  year,  have  also 
been  included.  The  Synopsis,  Table  of  Cases,  and  Index  have 
been  revised  so  that,  as  published  in  this  volume,  they  cover  all 
cases  in  both  volumes.  A  change  in  editorial  policy  has  resulted 
in  excluding  from  this  supplement  briefs  of  selected  rulings  of  the 
Treasury  Department  such  as  are  found  in  the  original  volume. 
In  view  of  the  fact  that  these  rulings  are  completely  listed  and 
digested  in  other  publications,  it  is  felt  that  this  work  should 
hereafter  confine  itself  exclusively  to  the  field  of  compiling  and 
abstracting  the  decisions  of  federal  and  state  courts.  The  paging 
of  this  book  is  a  continuation  of  the  paging  of  the  original  book, 
so  that  in  all  references  to  page  numbers  the  two  are  treated  as 
one  volume  consecutively  paged.  This  volume  has  been  prepared 
under  the  editorial  supervision  of  Paul  W.  Kurz  and  Charles  0. 
Parker. 

KixMILLER  &  BAAR. 

October  1,  1922. 


686700 


Digitized  by  tine  Internet  Arciiive 

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TABLE  OF  CONTENTS 

Page 

Outline  of  Synopsis 759 

Income  and  Excess  Profits  Taxes 759 

Capital  Stock  Tax 761 

Estate  and  Inheritance  Taxes 762 

Stamp  Taxes 762 

Miscellaneous  War  Taxes 762 

Administration  and  Procedure 762 

Questions  of  Constitutionality 763 

Synopsis  of  Cases 765 

Cases,  Federal  and  State  Courts 835 

Table  of  Cases 1013 

Index 1049 


SYNOPSIS 

and  brief  of  principal  points  decided  in  the 

545  UNITED  STATES  TAX  OASES 

AND  SUPPLEMENT 


OUTLINE 

Page 

INCOME  AND  EXCESS  PKOFITS  TAXES 765 

I.  Application  of  Tax,  Rates,  and  Exemptions 765 

(A)  Individuals 765 

1.  Exemptions   765 

2.  Surtax 765 

3.  Income  of  Decedents 765 

4.  Non-residents  and  Aliens 765 

(B)  Corporations    766 

1.  Profits  Tax  Computation 766 

2.  Profits  Tax  Fixed  by  Comparison 766 

3.  Profits  Tax  Where  Invested  Capital  Not  More  Than 

Nominal  767 

4.  War  Profits  Credit 767 

5.  Consolidated  Returns 767 

6.  Exempt  Corporations 767 

7.  Foreign  Corporations 768 

8.  Dissolved  Corporations 768 

(C)  Personal  Service  Corporations 768 

(D)  Trusts  and  Associations 770 

(E)  Estates  and  Fiduciaries 771 

1.  Estates  Taxed  as  Entities 771 

2.  Net  Income  of  an  Estate 771 

3.  Returns  of  Fiduciaries 772 

4.  Fiduciaries  as  Agents 772 

II.  Invested  Capital 772 

(A)    Definition  and  Nature 772 

1.  General 772 

2.  Paid-up  Capital  Stock 773 

759 


760  545  U.  S.  TAX  CASES 

Page 

3.  Paid-in  Surplus 773 

4.  Earned  Surplus  and  Undivided  Profits 773 

5.  Borrowed  Capital ^ 774 

6.  Good  Will  and  Intangible  Property  as  Capital 775 

7.  Tangible  Assets 775 

8.  Appreciation  and  Depreciation 775 

9.  Reorganizations 776 

10.  Determination  of  Value  of  Property 776 

11.  Minimum  Invested  Capital 777 

12.  Allocation  of  Capital 777 

III.    Determination  of  Net  Income 777 

(A)  Nature  of  Taxable  Income 777 

1.  In  General 777 

2.  Time  for  Reporting 779 

3.  Receipt  and  Accrual  Computation 780 

4.  Devices  to  Escape  Taxation 780 

(B)  Items  Not  Included  in  Gross  Income 780 

1.  Compensation  of  Public  Employees 780 

2.  Other  Items 781 

(C)  Gross  Taxable  Income 781 

1.  Income  from  Trade,  Business  and  Commerce 781 

2.  Income  of  Insurance  Companies 782 

3.  Income  from  Sales  of  Property 782 

(a)  Taxability  of  Profit 782 

(b)  Determination  of  Profit 783 

(c)  Reorganizations  and  Exchange  of  Property. . .  784 

4.  Interest  Received 784 

5.  Dividends 785 

(a)  Held  Taxable ! 785 

(b)  Non-taxable  Distributions 785 

(c)  Liquidation  Dividends 786 

(d)  Stock  Dividends 786 

(e)  Dividends  Paid  in  Property 787 

6.  Rents  and  Royalties 787 

7.  Miscellaneous  Forms  of  Income 787 


545  U.  S.  TAX  CASES  761 

Page 

(D)    Deductions  from  Gross  Income 788 

1.  Expenses  of  Carrying  on  Business 788 

(a)  Nature  of  Expense 788 

(b)  Business  and  Pei-sonal  Expenses  Contrasted. .  788 

(c)  Permanent  Investments 789 

(d)  Activities  Other  Than  Business 789 

2.  Inventories 789 

3.  Salaries 790 

4.  Repairs,  Renewals  and  Replacements 791 

5.  Reserves  of  Insurance  Companies 791 

6.  Interest 791 

7.  Taxes f'. 792 

8.  Losses   792 

(a)  Incurred  in  Trade  or  Business 792 

(b)  Other  Losses 793 

(c)  When  Losses  Are  Deductible 793 

9.  Depreciation 794 

(a)  Definition 794 

(b)  Rates  of  Depreciation 794 

10.  Depletion  of  Natural  Resources 795 

11.  Contributions  to  Charities 796 

IV.    Returns  and  Payment  of  Tax 796 

1.  Necessity  for  Filing  Returns 796 

2.  Returns  Negligently  Understated 796 

3.  Prosecution  for  Fraudulent  and  False  Return 797 

4.  Prosecution  for  Perjury  in  Returns 797 

5.  Administration  and  Procedure 797 

6.  Payment  of  Tax 798 

7.  Payment  at  Source 798 

(a)  Non-resident  Aliens 798 

(b)  Tax-Free  Bonds 798 

(c)  Tax-Free  Rent 798 

CAPITAL  STOCK  TAX 798 

(A)  Inactive  Corporations 798 

(B)  Active  Corporations 799 

(C)  Determination  of  Tax 799 


762  545  U.  S.  TAX  CASES 

Page 
ESTATE  AND  INHERITANCE  TAXES 800 

(A)  Constitutionality  and  Nature 800 

(B)  Gross  Estate 801 

(C)  Deductions 803 

(D)  Payment  of  Tax 803 

STAMP  TAXES 804 

(A)  Form  and  Face  of  Instrument 804 

(B)  Persons  Responsible  for  Payment  of  Tax 804 

(C)  Effect  of  Failure  to  Affix  or  Cancel  Stamps 804 

(D)  Instruments  and  Transactions  Taxable 805 

1.  Bonds  and  Certi^ates  of  Indebtedness 805 

2.  Stock  Issue  and  Transfer 805 

3.  Sales  on  Exchange  or  Board  of  Trade 805 

4.  Conveyance  of  Realty 806 

MISCELLANEOUS  WAR  TAXES 806 

(A)  Transportation  and  Messages 806 

(B)  Sales  Tax 806 

(C)  Occupations  Tax 807 

(D)  Child  Labor  Tax 807 

(E)  Munitions  Tax 807 

ADMINISTRATION  AND  PROCEDURE 807 

(A)  Collection  of  Taxes 807 

1.  Assessment 807 

2.  Summary  Proceedings 808 

3.  Civil  Actions 808 

4.  Lien  for  Taxes 809 

5.  Suits  to  Enjoin  Collection 810 

6.  Limitations 811 

7.  Compromise 812 

8.  Application  of  Payments 812 

(B)  Abatement  and  Refund 812 

1.  Review  of  Administrative  Action 812 

2.  Effect  of  Abatement 813 

3.  Claim  for  Refund  and  Credit 813 

(C)  Suit  to  Recover  Tax  Paid 813 

1.    Necessity  for  Involuntary  Payment 813 


545  U.  S.  TAX  CASES  763 

Page 

2.  Necessity  for  Appeal 815 

3.  Limitations 816 

4.  Jurisdictional  Amount 817 

5.  Ketroactive  Legislation 818 

6.  Counter  Claim 818 

7.  Parties 818 

(D)  Rules  of  Practice  and  Procedure 819 

1.  Pleading  and  Procedure 819 

2.  Burden  of  Proof.. 819 

3.  SufSciency  of  Evidence 820 

4.  Costs  and  Interest 820 

5.  Appeal  and  Error 821 

(E)  Jurisdiction  of  Courts 821 

(F)  Regulations  by  Treasury  Department 822 

1.  Power  to  Make 822 

2.  Effect  of 822 

(G)  Interpretation  of  Statutes 824 

QUESTIONS  OF  CONSTITUTIONALITY 825 

(A)  Powers  of  Taxation 825 

1.  Federal 825 

2.  State  826 

3.  Territorial   826 

(B)  Requirements  of  Income  Taxation 826 

1.  Uniformity  826 

(a)  As  Required  by  Federal  Constitution 826 

(b)  As  Required  in  Various  States 827 

2.  Validity  of  Exemptions 828 

3.  Discrimination 829 

4.  Double  Taxation 830 

5.  Direct  Taxation 830 

6.  Retroactive  Operation  of  Tax  Law 831 

7.  Due  Process 832 

8.  Searches  and  Seizures 833 

9.  Law  Impairing  Contract  Obligations 833 

10.    State  Taxation  Affecting  Interstate  Commerce 833 


SYNOPSIS  OF  CASES 


INCOME  AND  EXCESS  PROFITS  TAXES 

I.   Application  of  Tax,  Rates  and  Exemptions 

(A)    Individuals 

(1)    Exemptions 

To  treat  the  family  as  a  unit  in  granting  only  a  single  personal  ex- 
emption and  to  provide  no  personal  exemption  for  corporations  are  not 
unconstitutional  discriminations. 

Robertson  v.  Pratt,  p.  434. 

The  salary  of  a  state  officer  may  not  be  applied  against  the  exemption 
from  Federal  income  tax  which  he  is  allowed  with  respect  to  his  other 
income. 

United  States  v.  Ritchie,  p.  569. 

A  similar  rule  is  applied  in  the  case  of  Federal  officers  where  state 
income  tax  acts  are  involved. 

Biseoe  v.  Tax  Commissioner,  p.  93. 

The  exemptions  allowed  by  the  Act  of  1913  apply  only  to  normal  tax 
and  cannot  be  extended  to  the  surtax. 

Cohen  v.  Lowe,  Collector,  p.  147, 

(2)    Surtax 

A  graduated  income  tax  is  not  unconstitutional. 
Wells  ads.  Alderman,  p.  599. 

(3)     Income  of  Decedent 

Where  a  person  dies  before  a  retroactive  income  tax  act  was  passed, 
i:)ut  after  the  date  upon  which  it  was  designated  to  take  effect,  his  executors 
aiust  make  a  return  of  his  income  at  the  required  time. 
Brady  v.  Anderson,  Collector,  p.  105. 

The  income  of  a  decedent,  who  died  before  the  time  for  making  a  re- 
turn, is  taxable.  The  duty  of  making  the  return  devolves  upon  the  legal 
representative  of  the  deceased. 

Mandell  v.  Pierce,  p.  328. 

(4)    Non-residents  and  Aliens 

A  state  has  jurisdiction  to  levy  an  income  tax  against  a  non-resident 
upon  that  portion  of  his  income  derived  from  property  within  the  state. 
Shaffer  v.  Howard,  p.  444. 

A  citizen  of  the  United  States  who  resides  in  the  Philippines  is  subject 
to  tax  under  the  Revenue  Act  of  1918. 

Lawrence  v.  Wardell,  Collector,  p.  304. 

A  state  may  tax  the  income  of  a  beneficiary  of  a  trust,  residing  in  the 
state,  although  the  trust  is  created  and  administered  in  another  state. 
Maguire  v.  Trefry,  p.  326. 

Stocks  and  bonds  held  in  the  United  States  by  an  agent  of  a  non- 
resident alien  are  property  within  the  United  States,  and  the  income  from 
them  paid  to  such  non-resident  alien  is  taxable. 

DeGanay  v.  Lederer,  Collector,  p.  175. 

765 


766  545  U.  S.  TAX  CASES 

Under  a  state  Act,  beneficiaries  of  a  trust  were  not  taxable  on  sums 
of   money    received   from   trustees,   resident    within   the    state,    which    the 
trustees  received  as  rent  from  mines  located  outside  of  the  state. 
State  ez  rel.  Mariner  v.  Hampel,  p.  466. 

(B)    Corporations 

(1)    Profits  Tax — Computation 

The  "deduction"  allowed  by  the  Revenue  Act  of  1917  is  to  be  made 
only  from  the  amounts  of  net  income  otherwise  within  the  various  brackets, 
in  computing  the  amount  of  tax,  and  is  not  to  be  made  from  net  income  be- 
fore the  computation  begins. 

Ehret  Magnesia  Mfg.  Co.  v.  Lederer,  p.  194. 

Greenport  Basin,  etc.,  Co.  v.  United  States,  p.  242. 

(2)    Profits  Tax  Fixed  by  Comparison 

Where  statutory  invested  capital  is  negligible  in  comparison  with  the 
volume  of  business  transacted  and  seriously  disproportionate  to  invested 
capital  of  other  taxpayers  doing  a  similar  business,  assessment  by  com- 
parison is  proper. 

A.  E.  E.  364,  p.  665. 

Inasmuch  as  advertising  expenses  cannot  be  capitalized,  where  large 
sums  have  been  spent  in  advertising,  an  abnormal  condition  affecting  in- 
vested capital  exists  and  excess  profits  taxes  should  be  determined  by  com- 
parison. 

A.  E.  M.   12,  p.   676. 

Where  a  corporation  has  intangible  assets  (such  as  good-will,  patterns 
and  patents)  which  are  earning  income,  but  under  statutory  provisions  can- 
not be  included  in  invested  capital,  it  is  entitled  to  assessment  by  com- 
parison. 

A.  R.  E.  110,  p.  638. 

Tax  should  be  assessed  by  comparison  where  invested  capital  cannot  be 
actually  determined,  where  the  income  was  derived  entirely  from  royalties 
on  patents,  and  where  the  volume  of  business  rests  practically  upon  the  in- 
dividual efforts  of  the  stockholders. 
A.  E.  E.  363,  p.  664. 

Good-will  paid  into  company  at  incorporation,  but  at  a  nominal  value, 
is  ground  for  assessment  of  excess  profits  tax  by  comparison. 
A.  E.  E.  332,  p.  660. 

Operation  of  business  with  large  borrowed  capital  is  a  ground  for  assess- 
ment of  excess  profits  tax  by  comparison. 
A.  E.  E.  327,  p.  659. 

A  partnership  engaged  in  the  produce  commission  business,  which  en- 
joyed a  "substantial  credit"  in  addition  to  capital  invested  by  the  part- 
ners and  derived  approximately  half  of  its  income  from  buying  produce 
outright  and  selling  same  for  its  own  account,  was  properly  assessed  by 
comparison  under  Section  210  of  the  Eevenue  Act  of  1917,  and  was  not 
entitled  to  consideration  under  Section  209  of  that  Act. 
A.  E.  E.  19,  p.  623. 

No  salaries  paid  to  officers  of  a  corporation,  or  unusually  low  salaries 
in  comparison  with  those  paid  to  officers  of  competing  concerns,  is  ground 
for  assessment  of  excess  profits  tax  by  comparison. 
A.  B.  B.  326,  p.  659. 


545  U.  S.  TAX  CASES  767 

Eeceipt  by  corporation  of  insurance  on  life  of  one  of  its  officers  may  be 
ground  for  assessment  of  excess  profits  tax  by  comparison. 
A.  E.  E.  327,  p.  659. 

Determination  of  tax  on  comparative  basis  not  proper  merely  because 
corporation  earned  within  taxable  year  a  high  rate  of  profit  on  a  normal 
invested  capital. 

A.  E.  E.  36,  p.  626. 

Where  statutory  invested  capital  is  in  excess  of  constructive  capital 
found  on  application  of  comparative  rate,  the  taxpayer  should  not  be  de- 
prived of  right  to  have  assessment  based  upon  statutory  invested  capital. 
A.  E.  E.  209,  p.  646. 

(3)    Profits  Tax  Where  Invested  Capital  Not  More  Than  Nominal 

See  infra.     (C)    Personal   Service   Corporations 

(4)    War  Profits  Credit 

The  median  established  as  provided  by  law  and  published  by  the 
Bureau  is  final.  The  law  and  regulations  do  not  authorize  the  Commissioner 
to  allow,  for  computing  the  war  profits  credit  under  the  provisions  of  Section 
311  (e)  of  Eevenue  Act  of  1918,  a  larger  percentage  of  prewar  income  to 
prewar  invested  capital  than  that  established  as  the  median. 
A.  E.  E.  36,  p.  626. 

(5)  Consolidated  Betums 

Investment  of  dividends  of  bank,  charged  to  a  "Stockholders'  Special 
Trustee  Account,"  in  enterprises  not  permitted  the  bank,  creates  a  trust 
which  must  report  as  a  corporation  and  must  file  a  consolidated  return  with 
the  bank. 

A.  E.  M.  43,  p.  689. 

(6)  Exempt  Corporations 

The  words  "of  a  purely  local  character"  in  paragraph  10  of  Section 
231  of  the  Eevenue  Act  of  1918  do  not  merely  limit  the  proviso  "or  like 
organizations"  but  apply  equally  to  all  of  the  enumerated  companies  set 
out  in  that  paragraph. 

Commercial  Health  &  Accident  Co.  v.  Pickering,  Collector,  p.  863. 

The  following  cases  and  rulings  deal  with  corporations  claiming  that 
no  part  of  their  net  income  inures  to  the  benefit  of  any  private  stockholders 
or  individuals,  and  that  they  are  exempt  from  taxation. 

Pacific  Bldg.  &  Loan  Ass'n  v.  Hartson.  p.  389. 

Herold,  Collector,  v.  Park  View  Bldg.  &  Loan  Ass'n,  p.  259. 

Lederer,  Collector,  v.  Stockton,  p.  307. 

Kemper  Military  School  v.  Crutchley,  p.  281. 

Com'l  Travelers  Life  &  Accident  Ass'n  v.  Eodway,  Collector, 
p.  152. 

A.  E.  M.  36,  p.  685. 

The  following  cases  pass  upon  the  requirements  for  classification  as  a 
building  and  loan  association. 

Central  Bldg.,  etc.,  Co.  v.  Bowland,  p.  132. 

Pacific  Bldg.  &  Loan  Ass'n  v.  Hartson,  p.  389. 

Herold,  Collector,  v.  Park  View  Bldg.  &  Loan  Ass'n,  p.  259. 

Com'l  Travelers  Life  &  Accident  Ass'n  v.  Eodway,  p.  152. 

Lilley  Building  &  Loan  Association  v.  Miller,  Collector,  p.  923. 


768  545  U.  S.  TAX  CASES 

A  corporation  is  not  exempt  as  a  building  and  loan  association  because 
organized  under  a  state  statute  describing  such  a  company  as  a  corporation 
for  the  purpose  of  raising  money  to  be  loaned  to  its  members  unless  the 
facts  show  that  the  corporation  has  the  attribute  of  mutuality  required 
under  the  Acts.  The  test  is  whether  the  business  transacted  with  the  gen- 
eral public  is  strictly  incidental  to  its  primary  business  as  a  mutual  building 
association. 

Lilley  Building  &  Loan  Company  v.  Miller,  Collector,  p.  923. 

A  mutual  insurance  association,  not  operating  under  the  lodge  system 
and  the  membership  of  which  is  not  restricted  to  any  one  locality,  which 
insures  the  lives  of  its  members  organized  into  circles,  assessments  being 
made  against  each  member  in  a  particular  circle  upon  the  death  of  one  of 
the  members  thereof,  the  assessments  being  sufficient  only  to  pay  losses  and 
expenses,  is  not  exempt  from  taxation  under  the  Acts  of  1916  and  1917. 

Bankers'   and   Planters'   Mutual  Insurance   Ass'n   v.   Walker, 
Collector,  p.  846. 
Income  received  by  trustee  for  benefit  of  a  corporation  organized  ex- 
clusively for  charitable  purposes  held  income  of  the  exempt  corporation  and, 
therefore,  not  taxable. 

Lederer,  Collector,  v.  Stockton,  p.  307. 

A  public  utility  corporation  organized  under  the  laws  of  California  is  a 
corporation  organized  for  profit  and,  therefore,  not  exempt  from  taxation. 
Union  Hollywood  Water  Co.  v.  Carter,  Collector,  p.  51-i. 
An  exemption  conferred  by  special  act  is  not  irrevocable,  but  may  be  re- 
pealed by  a  later  general  act. 

Christ  Church  v.  County  of  Philadelphia,  p.  140. 

(7)    Foreign  Corporations 

Foreign  corporation  held  to  have  transacted  business  in  and  received 
income   from   sources   within   the   United   States. 

Laurentide  Co.  v.  Durey,  Collector,  p.  302. 
A  domestic  corporation  deriving  all  its  income  from  and  doing  all  its 
business  in  Porto  Rico  is  subject  to  income  and  excess  profits  tax  as  though 
its  income  were  derived  from  the  continental  United  States. 

Porto  Eico  Coal  Co.,  Inc.,  v.  Edwards,  Collector,  p.  410. 

(8)    Dissolved  Corporations 

The  dissolution  of  a  corporation  before  the  due  date  of  a  return  does 
not  relieve  it  from  tax  liability. 

United  States  v.  General  Inspection  &  Loading  Co.,  p.  540. 
After  dissolution  of  a  corporation,  the  assets  which  were  distributed  to 
the  stockholders  were  subject  to  liability  for  the  income  tax  imposed  by 
retrospective  law  upon   income   received   by    the   corporation   prior   to   its 
dissolution. 

United  States  v.  McHatton,  p.  550. 

(C)    Personal  Service  Corporations 

Under  this  heading  are  collected  all  cases  dealing  with  corporations 
Laving  no  invested  capital,  or  a  capital  not  more  than  nominal. 

Section  209  of  the  Bevenue  Act  of  1917,  relating  to  corporations  having 
no  invested  capital,  or  a  capital  not  more  than  nominal,  is  not  limited  in 
application  to  concerns  rendering  personal  service. 

De  Laski  &  Throop,  etc.,  Co.  v.  Iredell,  Collector,  p.  177. 


545  U.  S.  TAX  CASES  .    769 

The  tax  is  assessable  against  a  partnership  under  Section  209  of  the 
Revenue  Act  of  1917,  as  a  business  having  no  invested  capital  or  not  more 
than  nominal  capital,  only  where  money  or  property  plays  no  part  in  the 
source  of  the  income,  or  so  small  a  part  as  to  be  practically  negligible.  The 
profits  of  a  business  having  no  capital,  even  though  not  withdrawn,  must 
be  used  in  the  business  to  constitute  capital.  Isolated  transactions  by  the 
partners,  requiring  capital,  but  not  conducted  as  a  part  of  any  trade  or 
business,  do  not  prevent  assessment  under  this  section. 
Porter  et  al.  v.  Lederer,  Collector,  p.  409. 

Since  patents  are  not   capital  in  an  economic  sense,  the  granting  of 
licenses  under  a  patent  would  seem  to  be  rendering  personal  service,  and 
not  employing  ' '  capital, ' '  certainly  no  more  than  a  * '  nominal  capital. ' ' 
De  Laski  &  Throop,  etc.,  Co.  v.  Iredell,  Collector,  p.  177. 
Apparently  contra — 

Lincoln  Chemical  Co.  v.  Edwards,  Collector,  p.  310. 

The  De  Laski  case  is  not  followed  by  the  Bureau  of  Internal  Eevenue, 
which  holds  that  income  from  patents  is  derived  from  the  employment  of 
capital. 

A.  E.  E.  363,  p.  664. 

Where  annual  receipts  were  approximately  $3,000  and  "earned  surplus" 
amounted  to  $2,000,  capital  is  not  "nominal." 

Lincoln  Chemical  Co.  v.  Edwards,   Collector,  p.  310. 

One  is  not  a  broker  who  buys  and  sells,  and  undertakes  and  assumes 
all  the  risks  and  enjoys  all  the  benefits  of  a  merchandising  business. 

Cartier  et  al.  v.  Doyle,  Collector,  p.   126;   reversed   on   other 
points,  p.  854, 

A  corporation  engaged  not  merely  in  buying  and  selling  on  commission 
but  also  in  trading  substantially  on  its  own  account,  and  employing  capital 
in  making  advances  for  its  principal  and  also  in  buying  merchandise  on  its 
own  account,  held  not  to  be  a  business  with  no  invested  capital  or  not  more 
than  a  nominal  capital. 

Martin  v.  Edwards,  Collector,  p.  932. 

Concerns  do  not  lose  classification  as  personal  service  corporations 
merely  because  of  size  of  their  capital  if  the  employment  of  such  capital 
is  merely  incidental. 

A.  E.  E.  24,  p.  624. 

Where  income  was  derived  both  from  commissions  on  sales  of  produce 
belonging  to  others  and  from  profits  on  sales  of  produce  purchased  for  its 
own  account,  and  where  the  firm  also  enjoyed  a  substantial  credit,  more 
than  a  nominal  capital  was  employed  in  the  business. 
A.  E.  E.  19,  p.  623. 

A  corporation  dealing  largely  in  services  of  others,  who  are  not  con- 
nected with  the  corporation  through  stock  ownership,  but  merely  as  em- 
ployees, is  not  a  personal  service  corporation. 

A.  E.  M.  59,  p.  692. 

A.  E.  E.  464,  p.  671. 

A  company  engaged  in  the  freight  forwarding  business,  with  income 
from  sources  other  than  commissions,  and  customarily  advancing  the  neces- 
sary transportation  costs  for  customers,  employs  more  than  nominal  capital. 
A.  E.  E.  7,  p.  619. 


770  545  U.  S.  TAX  CASES 

Where  direct  buying  and  selling  of  merchandise  yields  30%  of  a  firm's 
income,  and  the  balance  sheet  shows  numerous  accounts  receivable  and  pay- 
able, assessment  under  Section  209  of  the  Eevenue  Act  of  1917  was  denied, 
as  more  than  a  nominal  capital  was  employed. 
A.  E,  E.  364,  p.  665. 

For  the  distinction  between  capital  employed  in  banking  and  in  other 
phases  of  the  business  of  a  trust  company,  see  — 

Anderson  v.  Farmers'  Loan  &  Trust  Co.,  p.  72. 

Fidelity  and  Deposit  Co.  of  Maryland  v.  United  States,  p.  887. 

Fidelity  Title  &  Trust  Co.  v.  United  States,  p.  891. 

Mayes,  Collector,  v.  United  States  Trust  Co.,  p.  935. 

(D)    Trusts  and  Associations 

Trusts  were  not  taxable  under  the  Act  of  August  5,  1909. 

Elliott  V.  Freeman,  p.  198. 

A  trust  cannot  be  held  to  be  an  association  taxable  as  a  corporation, 

where  the  trustees  have  discretionary  powers,  by  combining  the  trustees  and 

the  beneficiaries,  the   latter   having   other  and   contrasting  functions   and 

powers  but  not  being  associated  in  any  way  for  the  control  of  the  trustees. 

Crocker  et  al..  Trustees,  v.  Malley,  Collector,  p.  161. 

The  character  of  a  business  organization  is  to  be  gauged  rather  by  the 
powers  of  the  certificate  holders  than  by  the  extent  to  which  those  powers 
have  at  any  time  been  exercised,  and  so,  where  the  certificate  holders  have 
the  absolute  powers  of  termination  and  amendment  of  the  trust  document, 
the  ultimate  control  of  the  business  being  thus  vested  in  them,  the  organ- 
ization is  an  association. 

In  re  Associated  Trust,  p.  839. 

A  Massachusetts  trust,  organized  to  own  and  operate  real  estate,  having 
transferable  shares  of  stock,  must  be  classified  as  an  association  where  the 
stockholders  are  vested  with  the  powers  to  remove  the  trustees,  terminate 
the  trust,  and  modify  the  instrument  in  any  particular,  since  the  seat  of  real 
power  is  thus  with  the  stockholders;  and  also,  because  Massachusetts  stat- 
utes have  now  given  such  trusts  a  statutory  basis  as  quasi-corporate  associa- 
tions. 

Malley,  formerly  Collector  v.  Howard,  et  al..  Trustees,  p.  928. 

Agreement  held  to  create  a  joint  stock  company  or  association  subject 
to  income  tax  under  Eevenue  Act  of  1913,  because  control  over  trustees 
rested  indirectly  in  beneficiaries. 

Chicago  Title  and  Trust  Co.  v.  Smietanka,  Collector,  p.  136. 

An  unincorporated  association  which  has  a  capital  stock  represented  by 
shares,  is  managed  by  a  board  of  directors,  and  has  most  of  the  attributes 
of  a  corporation,  is  taxable  as  a  corporation. 
Eoberts  v.  Anderson,  p.  432. 

Where  dividends  are  not  paid  to  stockholders  of  a  bank  but  are  credited 
to  a  "Stockholders*  Trustee  Account"  and  invested  in  deals  not  counte- 
nanced by  the  Comptroller  of  Currency,  an  association  taxable  as  a  corpora- 
tion is  created,  and  is  required  to  join  in  a  consolidated  return  with  the 
bank. 

A.  E.  M.  43,  p.  689. 


545  U.  S.  TAX  CASES  771 

(E)    Estates  and  Fiduciaries 

(1)  Estates  Taxed  as  Entities 

A  trustee  is  a  taxable  person  under  the  Revenue  Acts  of  1916  and  1917. 
Merchants  Loan  and  Trust  Co.  v.  Smietanka,  p.  345. 

Undistributed  net  income  of  a  trust  estate  under  the  control  of  a  resi- 
dent fiduciary  is  taxable  in  the  same  manner  as  income  accruing  to  an  un- 
married resident  individual. 

A.  E.  M.  37,  p.  685. 

Under  a  state  act,  income  derived  from  trust  property  without  the 
state  was  held  not  to  be  taxable  to  a  non-resident  trustee  who,  as  well  as 
the  beneficiaries,  resided  without  the  state,  although  he  rendered  his  accounts 
to  a  court  within  the  state. 

Bayfield  County  v.  Pishon,  p.  86. 

A  payment  by  a  corporation  to  a  beneficiary,  both  of  whom  resided 
outside  the  state  was  held  to  be  taxable  income  to  the  trustee  in  the  state 
where  he  resided. 

State  ex  rel.  Wisconsin  Trust  Co.  et  al.  v.  Phelps,  p.  473. 

Under  a  state  act,  income  received  by  a  trustee  was  held  taxable  even 
though  it  was  payable  as  an  annuity  to  a  designated  beneficiary,  and  in- 
heritance tax  had  already  been  collected  upon  the  annuity. 
State  ex  rel.  Hickox  v.  Widule,  p.  480. 

Under  the  Hawaiian  Act,  income  received  by  a  trustee  from  the  trust 
fund,  payable  to  designated  persons,  was  held  not  to  be  taxable  income  of 
the  trustee. 

Wilder  v.  Hawaiian  Trust  Company,  p.  605. 

(2)  Net  Income  of  an  Estate 

It  is  not  within  the  power  of  a  testator  to  render  a  fund  non-taxable. 

Merchants  Loan  and  Trust  Co.  v,  Smietanka,  p.  345. 
Non-resident  alien  fiduciaries  of  trusts  subject  to  the  jurisdiction  of  a 
foreign  country  are  taxable  on  undistributed  net  income  from  sources  within 
the  United  States. 

A.  R.  M.  37,  p.  685. 

Under  the  Act  of  October  3,  1913,  income  held  and  accumulated  by  a 
trustee  for  the  benefit  of  unborn  and  unascertained  persons  is  not  taxable. 

Smietanka,  Collector  v.  First  Trust  &  Savings  Bank,  Trustee, 
p.  979;  aiSrming  case  below,  p.  215. 

NOTE. — Acts  subsequent  to  the  1913  Act  specifically  declare  that  the 
income  accumulated  in  trust  for  the  benefit  of  unborn  or  unascertained  per- 
sons shall  be  taxed  and  assessed  to  the  trustee. 

Under  the  Act  of  October  3,  1913,  an  amount  received  under  a  will  from 
the  income  of  an  estate  by  a  person  having  no  interest  in  the  principal,  is 
not  taxable  income  to  the  beneficiary. 

Gavit  V.  Irwin,  Collector,  p.  898. 

Attorneys'  fees  in  a  suit  to  establish  title  to  trust  property  are  not  an 
allowable  deduction  in  the  return  of  the  fiduciary. 
A.  R.  E.  284,  p.  655. 


772  545  U.  S.  TAX  CASES 

(3)  Betums  of  Fiduciaries 

The  duty  of  making  return  for  a  person  who  died  before  the  time  for 
making  the  return  devolves  upon  the  legal  representative  of  the  deceased. 
Mandell  v.  Pierce,  p.  228. 
Brady  v,  Anderson,  Collector,  p.  105. 

An  estate  is  entitled  to  personal  exemption  of  $1,000,  regardless  of  the 
citizenship  of  the  creator  of  the  trust  or  of  the  ultimate  beneficiaries. 
A.  E.  M.  37,  p.  685. 

(4)  Fiduciaries  as  Agents 

Income  received  by  a  receiver  appointed  to  take  over  and  manage  the 
property  of  a  corporation  is  not  taxable  under  the  Act  of  August  5,  1909. 
United  States  v.  Whitridge  Eeceiver,  p.  579. 
Pennsylvania  Steel  Co.  et  al.  v.  N.  Y.  C.  E.  E.  et  al,,  p.  399. 

Not  under  the  Eevenue  Acts  of  1913,  1916,  1917. 

Equitable  Trust  Co.,  of  N.  Y.,  v.  Pacific  Ey.  Co.  et  al.,  p.  203. 

Lathers  et  al.  v.  Hamlin,  p.  300. 

Western  Pacific  E.  E.  Co.  v.  Scott,  p.  602. 

Income  received  by  a  trustee  of  a  bankrupt  corporation,  which  income  is 
not  the  result  of  operating  the  business,  is  not  subject  to  tax  under  the 
Eevenue  Act  of  1916. 

In  re  Heller,  Hirsh  &  Co.,  p.  255. 

The  United  States  has  no  present  provable  claim  against  the  receivers 
of  a  corporation  for  income  taxes  on  the  corporation's  receipt  of  an  amount 
of  money  as  income  prior  to  the  expiration  of  the  calendar  year  for  which 
such  taxes  are  due  and  so  the  receivers  were  instructed  by  the  court  to  de- 
clare no  dividend  where  the  United  States  asserted  a  substantial  demand  for 
taxes  which  were  not  due. 

Pennsylvania  Cement  Co.  v.  Bradley  Contracting  Co.,  p.  954. 

A  fiduciary  who  hastened  distribution  before  the  due  date  of  a  tax  and 
then  had  nothing  with  which  to  pay  the  same,  would  be  personally  re- 
sponsible. 

Pennsylvania  Cement  Co.  v.  Bradley  Contracting  Co.,  p.  954. 

The  costs  and  expenses  of  administering  the  estate  of  a  bankrupt  are 
payable  from  the  estate  in  priority  to  income  taxes  due  the  United  States. 
In  re  Jacobson,  p.  275. 

The  state  court  is  not  the  proper  court  to  determine,  upon  application 
of  a  trustee  of  property  in  liquidation,  whether  taxes  are  legally  due  the 
United  States. 

In  re  Application  of  Willmann  et  al..  Trustees  in  Liquidation, 
p.  611. 

n.    Invested  Capital 

(A)    Definition  and  Nature 

(1)    (General 

Collateral  deposited  by  a  partner  as  security  for  repayment  of  a  loan 
to  the  partnership  cannot  be  held  to  be  "tangible  property  paid  in"  to  the 
partnership  and,  therefore,  is  not  invested  capital. 

Cartier,  et  al.  v.  Doyle,  Collector,  p.  854;  reversing  case  below, 
p.  126. 


545  U.  S.  TAX  CASES  773 

Withdrawals  made  by  partners  in  excess  of  sums  credited  to  each  but 
in  anticipation  of  a  distribution  of  profit  cannot  be  treated  as  invested 
capital. 

Cartier,  et  al.  v.  Doyle,  Collector,  p.  854;  reversing  ease  below, 
p.  126. 

(2)    Paid-Up  Capital  Stock 
Shares  issued  as  a  stock  dividend  cannot  be  said  to  have  been  paid 
for  in  tangible  property,  treating  the  old  shares  as  being  paid  in  for  the 
new  ones. 

LaBelle  Iron  Works  v.  United  States,  p.  294. 
An  unconditional  subscription  to  capital  stock,  charged  to  the  account 
of  the  president,  bearing  interest  and  subsequently  converted  into  a  note, 
should  be  recognized  as  invested  capital. 
A.  E.  E.  167,  p.  644. 
As  to  the  extent   that  subscription  agreements  with  officers  and  em- 
ployees may  be  used  in  payment  of  stock,  see — 
A.  E.  E.  10,  p.  620. 
A.  E.  E.  167,  p.  644. 
"Paid-up  capital  stock,"  as  basis  for  the  interest  deduction  under  the 
Act  of  August  5,  1909,  does  not  include  amounts  paid  for  stock  in  excess 
of  par  value. 

N.  Y.,  New  Haven  &  Hartford  E.  Co.  v.  United  States,  p.  365. 

(Same  case  below,  p.  556.) 
Boston  &  Maine  E.  E.  v.  United  States,  p.  99. 

(3)    Paid-in  Surplus 

Paid-in  surplus  must  be  some  tangible  property  transferred  from  the 
owners  to  a  corporation  either  as  a  gift  or  at  a  value  less  than  the  actual 
cash  value  of  the  property  transferred,  and  in  practically  all  cases  where 
allowable,  involves  no  substantial  change  in  beneficial  interest. 
A.  E.  E.  233,  p.  652. 
Contracts  made  with  the  company  itself,  and  to  which  it  is  one  of  the 
parties,  cannot  be  held  to  be  paid-in  surplus. 
A.  E,  E.  233,  p.  652, 
Where  patents  are  turned  over  to  a  company  without   consideration, 
their  value  when  turned  in  may  be  included  in  invested  capital  under  the 
Eevenue  Act  of  1917. 

A.  E.  E.  70,  p.  632. 
No  paid-in  surplus  is  permissible,  directly  or  indirectly,  for  invested 
capital  purposes,  as  to  intangible  assets  conveyed. 
A.  E.  E.  307,  p.  658. 
Patents,  since  not  specifically  paid  for  in  cash  or  by  issuance  of  any 
stock,  held  not  invested  capital. 
A.  E.  E.  9,  p.  619. 
A  claim  for  addition  to  invested  capital  as  paid-in  surplus  may  be  based 
upon  an  appraisal  made  approximately  at  the  time  of  the  conveyance  of 
the  property. 

A.  E.  E.  161,  p.  643. 

(4)    Earned  Surplus  and  Undivided  Profits 

Earned  surplus  consists  of  realized  gains  or  profits  reduced  by  deprecia- 
tion, but  not  increased  by  appreciation. 
A.  E.  E.  71,  p.  633. 


774  545  U.  S.  TAX  CASES 

Undivided  profits  are  to  be  considered  surplus  within  the  meaning  of 
the  Act  of  June  13,  1898,  imposing  a  tax  on  bankers. 

Fidelity  Title  &  Trust  Co.  v.  United  States,  p.  891. 
Leather  Mfrs.  Nat.  Bank  v.  Treat,  Collector,  p.  918. 

Credits  of  earnings  to  accounts  of  stockholders,  where  no  formal  declara- 
tion of  a  dividend  has  been  made  by  the  board  of  directors,  no  interest  has 
been  or  is  to  be  paid  upon  amounts  so  credited,  and  under  the  State  law 
Bueh  credits  do  not  rank  with  amounts  due  general  creditors,  should  be 
regarded  as  part  of  earned  surplus  and  included  in  invested  capital. 
A.  E.  M.  71,  p.  633. 

Where,  prior  to  enactment  of  the  Excess-Profits  Tax  Act,  amounts  ex- 
pended by  a  company  for  advertising  and  developing  trademarks,  formulae, 
etc.,  were  capitalized,  having  previously  been  charged  to  expense,  it  was 
held  such  amounts  were  properly  included  in  the  invested  capital  of  the 
company. 

A.  E.  M.  134,  p.  704. 

When  such  expenditures  have  not  been  capitalized  prior  to  the  enact- 
ment of  the  Excess-Profits  Tax  Law,  they  may  not  later  be  added  to  the  in- 
vested capital. 

A.  E.  M.  12,  p.  676. 

Cash  surrender  value  of  insurance  policies  carried  on  the  lives  of  offi- 
cers or  employees  may  be  included  in  invested  capital  of  a  corporation. 
A.  E.  E.  229,  p.  649. 

Intangible  assets  conveyed  may  indirectly  be  basis  of  earned  surplus. 
A.  E.  E.  307,  p.  658. 

' '  Stockholders '  Special  Trustee  Account ' '  on  books  of  a  bank  to  which 
dividends  are  credited  should  be  included  in  invested  capital  in  a  consoli- 
dated return  for  the  bank  and  the  trust. 
A.  E.  M.  43,  p.  689. 

(5)    Borrowed  Capital 
Where  a  partnership  operated  on  capital  secured  as  a  loan  from  a  bank 
on  partnership  notes,  endorsed  by  the  partners  and  secured  by  a  deposit  of 
collateral  by  one  of  the  partners,  it  was  held  to  have  no  invested  capital, 
since  the  Act  excluded  from  invested  capital  borrowed  money. 

Cartier,  et  al.  v.  Doyle,  Collector,  p.  854;  reversing  case  below, 
p.  126. 
Where  money  is  paid  or  left  in  the  business,  and  if  interest  is  paid  or 
to  be  paid  on  such  amount,  or  if  the  stockholders'  or  officers'  right  of  re- 
payment of  any  such  amount  ranks  with  or  before  that  of  general  creditors, 
it  is  borrowed  capital  and  must  be  excluded  from  invested  capital. 
A.  E.  E.  116,  p.  639. 

Profits  allowed  to  accumulate  for  a  long  period  and  prorated  among 
stockholders  at  deaths  of  various  stockholders,  as  they  occurred,  are  bor- 
rowed capital  and  excluded  from  invested  capital  even  though  non-interest 
bearing. 

A.  E.  E.  102,  p.  636. 

Amounts  paid  in  by  stockholders  and  credited  as  "Special  Accounts," 
to  which  dividends  duly  declared  were  also  credited,  which  accounts  were 
covered  by  interest  bearing  notes  and  the  principal  of  which  was  subrogated 
to  the  general  creditors,  are  borrowed  capital,  and  hence  excluded  from 
invested  capital. 

A.  E.  E.  102,  p.  636. 


545  U.  S.  TAX  CASES  775 

(6)    Goodwill  and  Intangible  Property  as  Capital 

Good  will,  to  be  included  in  invested  capital  under  the  Revenue  Act  of 
1917,  must  be  paid  for  specifically  in  cash  or  stock  by  the  corporation. 
A.  R.  R.  250,  p.  651. 
A.  R.  R.  413,  p.  668. 

Transactions  between  stockholders  and  individuals  in  sale  of  stock  of 
corporation  cannot  create  good  will  for  invested  capital  purposes,  no  matter 
at  what  price  the  stock  sells. 

A.  R.  R.  413,  p.  668. 

No  paid-in  surplus  for  invested  capital  purposes  is  permissible  directly 
or  indirectly  as  to  intangible  assets  conveyed. 
A.  R.  R.  307,  p.  658. 

Upon  a  corrected  allocation  of  stock  to  tangibles  and  intangibles  ac- 
quired, earned  surplus  and  invested  capital  were  increased  by  reason  of 
intangible  assets  conveyed. 

A.  R.  R.  307,  p.  658. 

Although  some  proportion  of  all  advertising  is  in  effect  good  will,  it  is 
impossible  to  allocate  any  definite  percentages  as  between  capital  invest- 
ment and  selling  costs,  and  all  must  be  charged  as  expense. 
A.  R.  M.  12,  p.  676. 

Neither  the  cost  of  patents  charged  to  expense  nor  their  appreciated 
value  may  be  included  in  invested  capital. 
A.  R.  R.  71,  p.  633. 

Expiration  of  patents  for  which  stock  was  issued  would  not  affect 
invested  capital. 

A.  R.  R.  436,  p.  670. 

(7)    Tangible  Assets 

Revenue  Act  of  1917  classifies  patents  as  tangible  property. 
A.  R.  R.  70,  p.  632. 

(8)    Appreciation  and  Depreciation 

Unrealized  appreciation  in  value  of  assets  over  and  above  cost  cannot 
be  included  in  invested  capital  under  Revenue  Act  of  1917. 
La  Belle  Iron  Works  v.  United  States,  p.  294. 

Realization  during  the  taxable  year  of  appreciation  in  value  occurring 
before  March  1,  1913,  cannot  be  included  in  invested  capital  of  the  taxable 
year. 

A.  R.  M.  51,  p.  691. 

Neither  the  cost  of  patents  charged  to  expense  nor  their  appreciated 
value  may  be  included  in  invested  capital. 
A.  R.  R.  71,  p.  633. 

Appreciation  cannot  offset  depreciation  in  value  of  assets  through 
wear,  tear  and  exhaustion. 

A.  R.  R.  71,  p.  633. 
There  is  no  warrant  for  reducing  earned  surplus  because  of  an  alleged 
failure  to  charge  off  sufficient  depreciation  in  the  past,  unless  the  depreciable 
assets  of  a  corporation  are  valued  on  its  books  at  the  beginning  of  the  tax- 
able year  at  an  amount  in  excess  of  their  actual  value  at  that  time. 
A.  R.  M.  106,  p.  700. 


776  545  U.  S.  TAX  CASES 

Invested  capital  originally  paid  in  can  be  reduced  only  on  one  condi- 
tion, namely,  return  to  stockholders  through  liquidation;  consequently  ex- 
piration of  patents  for  which  stock  was  issued  would  not  affect  invested 
capital. 

A.  E.  E.  436,  p.  670. 

(9)    Eeorganizations 

Every  corporate  entity  is  a  new  organization,  even  though  officers,  di- 
rectors, or  proportions  of  stockholdings  remain  the  same  as  in  the  old 
corporation.  The  only  exception  is  the  case  of  a  mere  change  of  domicile, 
that  is  surrender  of  charter  in  one  state  and  taking  out  of  a  new  charter 
in  a  different  state  without  change  in  the  amount  of  stock,  the  identity 
of  the  stockholders,  or  the  capital  and  surplus. 
A.  E.  M.  60,  p.  692. 

A  corporation,  similar  to  its  predecessor  (a  bankrupt  corporation)  only 
in  that  the  product  manufactured  is  sold  under  the  same  name  and  is  pro- 
duced in  the  same  location,  is  substantially  a  continuation  of  the  predecessor 
for  excess  profits  tax  purposes,  in  the  determination  of  the  prewar  credit. 
A.  E.  E.  221,  p.  647. 
Where,  under  state  law,  a  corporation  ceased  to  exist  when  its  charter 
expired,  obtaining  of  a  new  charter  is  a  reorganization,  and  determination 
of  invested  capital  must  be  as  of  the  date  of  the  new  charter. 
A.  E.  E.  268,  p.  654. 

(10)    Determination  of  Value  of  Property 

Where  property  is  paid  into  a  corporation  for  stock,  the  common  dec- 
laration of  the  contributor  and  the  corporation  as  to  the  value  of  such  prop- 
erty is  at  least  equally  as  convincing  as  other  declarations  of  opinion  made 
or  procured  subsequently  when  the  interest  of  the  parties  has  shifted. 

Castner,  Curran  &  Bullitt,  Inc.  v.  Lederer,  Collector,  p.  857. 

An  appraisal  for  the  determination  of  value  as  of  a  certain  date  must 
be  made  in  the  light  only  of  knowledge  or  facts  ascertainable  on  that  date 
and  not  in  the  light  of  subsequent  happenings. 
A.  E.  E.  358,  p.  663. 
Appraisal  held  to  come  within  the  above  rule. 

A.  E.  E.  161,  p.  643. 
Appraisal  held  not  to  come  within  above  rule. 

A.  E.  E.  358,  p.  663. 
Plant  efficiency  method  of  determining  value  approved. 

A.  E.  M.  106  Explained,  p.  700. 
Value  of  good  will  should  be  determined  upon  basis  of  approximately  a 
five-year  return. 

A.  E.  M.  12,  p.  676. 
The  value  of  a  patent  is  fixed  by  the  value  of  stock  issued  therefor, 
as  determined  by  purchases  and  sales  of  the  stock  at  or  about  the  time  of 
issuance,  instead  of  by  an  appraisal  which  established  a  higher  figure. 
A.  E.  E.  436,  p.  670. 

Where  under  state  law  a  corporation  ceased  to  exist  when  its  charter 
expired,  and  a  new  charter  was  obtained  prior  to  March  3,  1917,  the  assets 
should  be  valued  as  of  the  date  of  transfer  to  the  new  corporation  resulting 
from  the  new  charter. 

A.  E.  E.  268,  p.  654. 


545  U.  S.  TAX  CASES  777 

Under  the  Eevenue  Act  of  1917  property  is  valued  for  invested  capital 
purposes  at  cost  to  original  owner  only  in  the  event  of  reorganization,  con- 
solidation, or  change  of  ownership  of  a  trade  or  business  after  March  3, 
1917,  where  50%  or  more  of  the  control  remains  in  the  same  person,  whereas 
under  the  Eevenue  Act  of  1918,  in  addition,  property  is  so  valued  upon  any 
change  of  ownership  after  March  3,  1917,  if  an  interest  or  control  in  such 
property  of  50%  or  more  remains  in  the  same  persons. 
A.  E.  E.  285,  p.  656. 

(11)    Minimum  Invested  Capital 

Where  a  taxpayer  has  an  invested  capital  more  than  nominal  in  amount, 
he  is  not  in  a  position  to  complain  of  regulations  promulgated  or  of  method 
employed  in  determining  the  amount  of  invested  capital,  when  the  arbitrary 
or  suppositious  invested  capital  fixed  upon  was  larger  in  amount  than  the 
invested  capital  actually  possessed  and  employed. 

Cartier,  et  al.  v.  Doyle,  Collector,  p.  126;   reversed  on  other 
points,  p.  854. 

Where  the  statutory  invested  capital  which   can  be  established  is  in 
excess  of  the  constructive  capital  found  by  application  of  the  comparative 
method  of  assessment,  the  taxpayer  should  not  be  deprived  of  his  right  to 
have  the  assessment  based  upon  the  statutory  invested  capital. 
A.  E.  E.  209,  p.  646. 

(12)    Allocation  of  Capital 
In  order  to  determine  what  portion  of  the   capital  is  employed  in  a 
certain  phase  of  a  business,  determine  what  part  of  the  total  assets  is  so 
employed;  the  same  proportion  of  the  capital  surplus  and  undivided  profita 
must  be  deemed  to  be  so  employed. 

Anderson  v.  Farmers'  Loan  &  Trust  Co.,  p.  72. 
Mayes,  Collector  v.  United  States  Trust  Co.,  p.  935. 

III.   Determination  of  Net  Income 
(A)    Nature  of  Taxable  Income 
(1)    General 
The  gain  derived  from  an  isolated  sale  of  property  is  included  within 
the  terms  of  the  Eevenue  Act  of  1916. 

Merchants  Loan  &  Trust  Co.  v.  Smietanka,  p.  345. 

Income  may  be  taxable  even  though  it  practically  or  theoretically  in- 
volves a  wasting  of  capital,  as  by  the  depletion  of  natural  resources. 
Stratton's  Independence  v.  Howbert,  p.  493. 

The  proceeds  of  a  life  insurance  policy  paid  to  a  corporation  beneficiary 
are  taxable  income  of  the  corporation. 
A.  E.  E.  335,  p.  661. 
Income  from  property  may  be  taxed,  despite  the  fact  that  there  is  also 
a  tax  upon  the  property  itself. 

State  ex  rel.  Bolens  v.  Frear  et  al.,  p.  464. 
Wilcox  V.  County  Commissioners,  p.  604. 
The  estimated  rental  value  of  a  residence  occupied  by  the  owner  may 
be  made  income   by   the  legislature. 

State  ex  rel.  Bolens  v.  Frear  et  al.,  p.  464. 
A  law  is  not  unconstitutional  because  the  net  income  which  it  taxes 
does  not  include  commodities  produced  and  consumed  by  the  taxpayer. 
Eobertson  v.  Pratt,  p.  434. 


778  545  U.  S.  TAX  CASES 

"Net  income"  under  the  Eevenue  Act  of  1917  includes  the  excess 
profits  tax  assessed  under  said  act,  despite  the  fact  that  the  latter  tax  may 
be  used  as  a  credit  in  computing  the  income  tax. 

People  ex  rel.  Barcalo  Mfg.  Co.  v.  Knapp  et  al.,  p.  400. 

A  state  may  tax  a  non-resident  thereof  on  income  received  from  prop- 
erty owned  by  him  within  the  state. 
Shaffer  v.  Carter,  p.  448. 

But,  interest  on  bonds  owned  by  a  non-resident  was  held  not  to  be 
taxable  under  another  state  act  simply  because  the  corporation  issuiag  the 
bonds  was  a  resident  of  the  state. 

Manitowoc  Gas  Co.  v.  Tax  Commissioner,  p.  329. 

An  inheritance  was  held  taxable,  under  a  state  income  tax  act,  to  a 
citizen  of  that  state,  though  the  property  inherited  was  located  in  another 
state. 

State  ex  rel.  Brenk  v.  Widule,  p.  479. 

The  profit  from  a  business  as  a  whole  is  the  excess  of  the  aggregate  gains 
from  all  sources,  over  the  aggregate  of  losses. 

Little  Miami,  etc.,  E.  E.  Co.  v.  United  States,  p.  312. 

Undistributed  surplus,  gains  or  earnings  carried  to  a  surplus  or  con- 
tingent fund  are  taxable  under  Act  of  July  13,  1866. 

Dollar  Savings  Bank  v.  United  States,  p.  184. 

According  to  the  Act  of  1866,  taxable  income  was  ascertained  from  the 
amounts  distributed  or  disposed  in  the  various  possible  modes. 
Eailroad  v.  Collector,  p.  419. 

The  Act  of  1864  imposed  an  income  tax  on  the  amount  distributed 
in  interest  and  dividends. 

Barnes  v.  The  Eailroads,  p.  85. 

Annuities  which  had  already  been  subjected  to  inheritance  tax  held 
not  to  constitute  income  under  the  income  tax  law  of  a  particular  state. 
State  ex  rel.  Kempsmith  v.  Widule,  p.  482. 

"Where  it  is  arranged  to  pay  to  stockholders  and  bondholders  of  a  cor- 
poration, as  dividends  or  interest,  rents  or  other  payments  which  would 
otherwise  be  received  by  the  corporation  which  furnished  the  consideration, 
such  payments  nevertheless  remain  income  of  the  corporation. 

Eensselaer  &  S.  E.  Co.  v.  Irwin,  p.  428. 

Northern  Eailway  Co.  of  New  Jersey  v.  Lowe,  Collector,  p.  376. 

Where  property  of  a  corporation  is  appraised  upon  its  books  at  a  higher 
value  than  that  at  which  it  had  formerly  been  carried,  this  increase  in 
valuation  is  not  income,  or  even  gain  in  any  proper  sense. 

Baldwin  Locomotive  Works  v.  McCoach,  Collector,  p.  83. 

United  States  ads.  Alpha  Portland  Cement  Co.,  p.  521. 

Forty  Fort  Coal  Co.  v.  Kirkendall,  Collector,  p.  223. 

A  transfer  of  stocks  for  a  promissory  note,  which  is  collectible,  or  an 
exchange  thereof  for  land,  followed  by  a  sale  of  such  land  within  the  year 
for  collectible  promissory  notes,  is  to  be  considered  a  sale  of  such  stock 
for  so  much  cash. 

United  States  v.  Smith,  p.  573. 

A  corporation  may  be  taxed  upon  the  amount  of  interest  paid  to  non- 
resident alien  bondholders. 

Eailroad  Co.  v.  Collector,  p.  419. 


545  U.  S.  TAX  CASES  779 

"Future"  contracts  which  are  "hedges"  against  actual  "spot"  or  cash 
transactions  may  be  incorporated  in  their  balance  sheets  by  dealers  in  cot- 
ton, grain,  etc.,  for  the  purpose  of  determining  taxable  income. 
A.  E.  M.  135,  p.  704. 

(2)    Time  for  Reporting 

Unless  otherwise  expressed  in  a  statute  the  word  "year"  will  always 
be  intended  to  mean  a  calendar  year;  but  when  applied  to  revenue,  the 
presumption  is  in  favor  of  its  referring  to  a  fiscal  year. 
Glasgow  V,  Eowse,  p.  230. 

Deferred  payments  of  the  selling  price  of  property,  not  represented  by 
notes  or  secured  in  any  way,  are  not  income  of  the  year  of  sale  of  the 
property. 

United  States  v.  Christine  Oil  &  Gas  Co.,  p.  532. 

The  mere  crediting  of  dividends  on  the  books  of  the  corporation  does 
not  make  them  income  to  the  stockholders. 
Park.  v.  Gilligan,  p.  393. 

Under  an  income  tax  act  of  1870,  a  promissory  note  was  held  not  to  be 
income  for  the  year  in  which  it  was  received. 

United  States  v.  Sehillinger,  p.  572. 

The  expression  "income  received  during  such  year"  looks  to  the  time 
of  realization  rather  than  to  the  period  of  aecruement. 

Fink,  Collector,  v.  Northwestern  Mut.  Life  Ins.  Co.,  p.  210. 

Insurance  companies  must  include  in  gross  income  premiums  collected 
by  agents  during  the  year,  even  though  they  are  not  transmitted  to  the 
company  until  the  following  year. 

Maryland  Casualty  Co.  v.  United  States,  p.  332. 

A  receiver  who,  at  the  end  of  his  receivership,  has  been  awarded  com- 
pensation in  addition  to  his  salary,  must  return  such  income  for  taxation  in 
the  year  of  its  determination  and  payment. 

Jackson  v.  Smietanka,  Collector,  p.  271. 

A  credit  allowed  by  a  corporation  on  its  books  to  apply  against  the 
overdrafts  of  an  ofScer  is  income  to  him  for  the  year  in  which  the  credit 
was  allowed. 

Holbrook  v.  Moore,  Collector,  p.  261. 

Cash  is  income  for  the  year  in  which  received,  despite  the  fact  that  it 
may  have  been  earned  in  a  prior  year. 
Woods  V.  Lewellyn,  p.  612. 

State  ex  rel.  Houghton  v.  Phelps,  County  Clerk,  p.  474. 
Jackson  v.  Smietanka,  Collector,  p.  271. 

Under  an  income  tax  act  which  did  not  exempt  property  acquired  by 
devise,  a  bequest  is  income  for  the  year  in  which  received,  and  not  for  the 
year  in  which  the  testator  died. 

Halsted  v.  Pratt,  p.  247. 

Where  responsibilities  and  duties  of  a  company  under  its  contracts  were 

not  fully  discharged  until  the  last  installment  is  received,  the  full  amount 

of  commissions  should  not  be  reported  as  income  for  the  year  the  contract 

was  entered  into,  but  should  be  reported  as  income  only  when  fully  earned. 

A.  E.  E.  464,  p.  671. 


780  545  U.  S.  TAX  CASES 

(3)    Becelpt  and  Accrual  Computation 

A  statute  which  taxes  "income  received"  contemplates  that  the  return 
shall  be  on  a  cash  basis. 

Mutual  Benefit  Life  Ins.  Co.  v.  Herold,  Collector,  p.  355. 
Lumber  Mutual  Fire  Insurance  Co.  v.  Malley,  Collector,  p.  320. 

There  can  be  no  receipt,  constructive  or  otherwise,  when  the  thing  to  be 
received  is  not  yet  determined. 
A.  E.  E.  375,  p.  666. 

A  corporation  which  uses  inventories  and  has  accounts  receivable  must 
make  its  returns  on  the  accrual  basis. 
A.  E.  E.  217,  p.  646. 

Banks  which  are  compelled  by  state  or  Federal  officials  to  keep  their 
books  in  a  certain  manner  which  does  not  show  the  correct  net  income  may 
keep  separate  books  or  records  from  which  they  will  be  able  to  file  correct 
returns. 

A.  E.  E.  377,  p.  667. 

(4)    Devices  to  Escape  Taxation 

A  transaction  which  is  carried  out  in  a  legal  manner  is  not  made  inef- 
fectual simply  because  its  motive  was  to  reduce  or  avoid  taxation  in  the 
future. 

Weeks  v.  Sibley,  p.  597. 

Equity  will  not  sanction  a  plan  whereby  the  stockholders  of  a  corpora- 
tion go  through  the  form  of  leasing  their  property,  while  retaining  it  in 
substance,  in  order  to  escape  federal  taxes. 

Allen  V.  Francisco  Sugar  Co.,  p.  67. 

Although  a  device  is  adopted  to  avoid  the  revenue  acts  and  has  the  effect 
of  avoiding  them,  yet  if  carried  out  by  means  of  legal  forms,  it  is  subject 
to  no  legal  censure. 

United  States  v.  Isham,  p.  545. 

(B)    Items  Not  Included  in  Gross  Income 
(1)    Compensation  of  Public  Employees 
Congress  cannot,  under  the  Constitution  of  the  United  States,  impose  a 
tax  upon  the  income  of  an  officer  of  a  state. 
Collector  v.  Day,  p.  149. 
United  States  v.  Eitchie,  p.  569. 
Freedman  v.  Sigel.  Collector,  p.  225. 

A  state  cannot  impose  an  income  tax  upon  the  salary  of  a  federal 
officer,  received  from  the  United  States. 

Purnell  v.  Page,  Sheriff,  p.  419. 

The  salary  of  a  federal  judge  cannot  be  subjected  to  federal  income 
tax  by  a  statute  passed  after  he  takes  office. 

Chief  Justice  Taney  to  Mr.  Chase,  p.  138. 
Evans  v.  Gore,  p.  203. 

A  state  constitutional  provision  that  powers  of  judges  shall  not  be 
diminished  during  their  continuance  in  office  prevents  the  imposition  of  a 
tax  upon  the  official  salary  of  a  state  judge,  and  it  can  make  no  difference 
whether  the  tax  be  levied  before  or  after  the  taking  of  office  or  that  the 
judge 's  salary  was  increased  by  the  same  assembly  which  passed  the  act  im- 
posing the  tax. 

Long  V.  Watts,  p.  926. 


545  U.  S.  TAX  CASES  781 

The  salaries  of  state  judges  cannot  be  taxed  by  a  state  statute  passed 
after  they  took  office. 

In  re  Taxation  of  Salaries  of  Judges,  p.  499. 

But,  in  another  case,  the  provisions  of  a  state  constitution  were  held  to 
permit  the  taxation  of  the  salaries  of  state  officers  by  an  act  passed  after 
they  took  office. 

State  ex  rel.  Wickham  v.  Nygaard,  p.  472. 
Compensation  received  by  railroad  officials  from  the  United  States  while 
the  railroads  were  under  federal  control  is  not  subject  to  a  state  income  tax. 
Biscoe  V.  Tax  Commissioner,  p.  93. 

A  state  may  not  tax  an  officer  of  the  United  States  revenue- cutter  serv- 
ice for  his  office  or  its  emolument. 

Dobbins  v.  Commissioners,  p.  180. 
A  clerk  in  a  post  office  is  not  a  federal  officer  within  the  meaning  of  the 
rule  exempting  the  salaries  of  such  officers  from  taxation  by  a  state. 
Melcher  v.  City  of  Boston,  p.  342. 

Travel  pay  received  by  an  army  officer  from  the  United  States  is  not 
exempt  from  federal  income  tax. 

Galin  v.  United  States,  p.  228. 

(2)    Other  Items 
The  right  to  subscribe  to  additional  shares  of  stock  of  a  corporation 
does  not  in  itself  constitute  taxable  income. 

Miles,  Collector  v.  The  Safe  Deposit  &  Trust  Co.  of  Baltimore, 
Guardian,  p.  941. 
Under  the  Act  of  October  3,  1913,  an  amount  received  under  a  will 
from  the  income  of  an  estate,  by  a  person  having  no  interest  in  the  prin- 
cipal of  the  estate,  is  not  taxable  income  to  the  beneficiary,  since  under  that 
Act  income  must  be  something  separate,  apart,  and  distinct  from  capital, 
both  belonging  to  the  individual  sought  to  be  taxed.     The  right  of  an  heir 
to  receive  property  or  money  of  a  decedent  is  not  capital. 
Gavit  V.  Irwin,  Collector,  p.  898. 
Bequests  to  executors,  in  lieu  of  all  compensation  or  commissions,  are  not 
taxable  income  when  received  by  the  executors,  since  the  bequests  were  pay- 
able irrespective  of  whether  or  not  the  services  were  rendered. 

Merriam  v.  United  States,  p.  939;  reversing  case  below,  p.  577. 
The  income  of  a  city  may  not  be  taxed  by  the  federal  government. 

United  States  v.  Railroad  Company,  p.  567. 
Alimony  received  is  not  taxable  income. 

Gould  V.  Gould,  p.  237. 
Income  from  tax-exempt  railroad  property  is  not  taxable. 
Oahu  E.  &  L.  Co.  v.  Pratt,  p.  380. 

(C)    Gross  Taxable  Income 
(1)    Income  From  Trade,  Business,  and  Commerce 
Contributions  to  a  public  utility  company  by  customers,  for  service  con- 
nections and  pipe  extensions,  are  income. 

Union  Hollywood  Co.  v.  Carter,  Collector,  p.  514. 
A  state  statute  may  impose  a  tax  on  income  from  business  transacted 
within  the  state,  even  though  such  transactions  involve  interstate  commerce, 
BO  long  as  a  burden  is  not  placed  upon  interstate  commerce. 

United  States  Glue  Co.  v.  Town  of  Oak  Creek,  p.  581. 


782  545  U.  S.  TAX  CASES 

(2)  Income  of  Insurance  Companies 

Under  the  1909  Act,  only  premiums  actually  received  in  cash  during 
the  year  need  be  reported  as  income  by  an  insurance  company. 
Lumber  Mutual  Fire  Ins.  Co.  v.  Malley,  p.  320. 

When  reserve  funds  of  an  insurance  company  are  released,  they  consti- 
tute income. 

Maryland  Casualty  Co.  v.  United  States,  p.  332. 

Neither  the  entire  deposits  made  by  members  of  a  mutual  insurance  com- 
pany to  cover  estimated  losses,  nor  the  interest  on  such  deposits,  are  taxable 
income  of  the  company. 

Jewelers  Safety  Fund  Society  v.  Lowe,  Collector,  p.  278. 

Surplus  accumulated  by  a  mutual  life  insurance  company  and  taxed  in 
one  year  is  not  again  taxable  in  the  following  year  when  it  forms  the  basis 
of  so-called  "dividends." 

Fink,  Collector,  v.  Northwestern  Mut.  Life  Ins.  Co.,  p.  210. 

So-called  "dividends"  of  a  mutual  life  insurance  company,  with  refer- 
ence to  which  the  policy  holder  does  not  exercise  the  option  of  withdrawal 
in  cash,  are  not  income  of  the  company. 

Mutual  Benefit  Life  Ins.  Co.  v.  Herold,  Collector,  p.  355. 

Eaton,  Collector,  v.  Connecticut  General  Life  Ins.  Co.,  p.  189. 

Prudential  Ins.  Co.  v.  Herold,  Collector,  p.  414. 

Herold,  Collector,  v.  Mutual  Benefit  Life  Ins.  Co.,  p.  259. 

Under  the  1913  Act,  "dividends"  paid  in  cash,  and  not  applied  by  the 
policyholder  to  the  payment  of  premiums,  may  not  be  excluded  from  gross 
income  by  an  insurance  company. 

Penn  Mutual  Life  Ins.  Co.  v.  Lederer,  Collector,  p.  397. 

(3)  Income  From  Sales  of  Property 

(a)    Taxability  of  Profit 
Under  a  statute  taxing  "the  gains,  profits  and  income  for  the  year" 
it  was  held  that  the  mere  fact  that  property  has  advanced  in  value  between 
the  date  of  its  acquisition  and  sale  does  not  authorize  the  imposition  of  a 
tax  upon  the  amount  of  the  advance. 

Gray  v.  Darlington,  p.  240. 

Enhancement  in  value  does  not  of  itself  constitute  taxable  income. 
Industrial  Trust  Co.  v.  Walsh,  Collector,  p.  268. 
Lumber  Mutual  Fire  Insurance  Co.  v.  Malley,  p.  319. 

Appreciation  in  value  of  capital  assets,  when  realized  by  sale,  is  income. 
Walsh  V.  Brewster,  p.  592. 
Goodrich  v.  Edwards,  p.  234. 
Scott  V.  Schwab,  p.  446. 
Hay,  Collector,  v.  Gauley  Mountain  Coal  Co.,  p.  254. 

Profit  on  the  sale  of  real  estate  is  taxable  for  the  year  in  which  title  or 
possession  passes,  and  not  for  the  prior  year  in  which  the  contract  of  sale 
was  signed  and  a  small  part  of  the  purchase  price  paid  down. 
A.  B.  E.  13,  p.  621. 

The  entire  amount  received  from  the  sale  of  a  stockholder's  right  to 
subscribe  for  new  shares  is  not  taxable  income,  but  the  sale  of  the  right 
must  be  treated  as  a  sale  of  a  portion  of  the  capital  interest  that  included 
the  old  shares. 

Miles,  Collector,  v.  The  Safe  Deposit  &  Trust  Co.  of  Baltimore, 
Guardian,  p.  941;  afiElrming  case  below,  p.  439. 


545  U.  S.  TAX  CASES  783 

A  bona  fide  exchange  of  stocks  for  other  property  is  not  a  sale  thereof 
from  which  profits  are  derived,  liable  to  taxation  as  income. 
United  States  v.  Smith,  p.  573- 

(b)    Determination  of  Profit 
The  gain  is  the  difference  between  cost  and  selling  price;  the  portion 
thereof  which   accrued   before   March    1,    1913,   is  not   taxable   under   the 
federal  acts. 

Goodrich  v.  Edwards,  p.  234. 
Walsh  V.  Brewster,  p.  592. 
Darlington  v.  Mager,  p.  165. 
Deposits  made  by  members  of  a  mutual  insurance  company  to  cover 
estimated  losses,  as  well  as  the  interest  on  such  deposits,  are  taxable  income 
of  the  company. 

The  principle  of  valuation  as  of  March  1,  1913,  applies  only  to  property, 
and  not  to  obligations  of  the  taxpayer  which  are  later  redeemed  at  less 
than  par. 

A.  E.  E.  545,  p.  675. 

Eealization  of  enhancement  in  value  accrued  prior  to  the  effective  date 
of  the  Act  is  not  taxable  income. 

Bundy  v.  Nygaard,  p.  116. 

Under  the  1909  Act,  only  so  much  of  the  profit  as  accrued  after  Decem- 
ber 31,  1908,  is  taxable  income. 

United  States  v.  Cleveland  C.  C.  &  St.  L,  Ey.  Co.,  p.  533, 
Mitchell  Bros.  v.  Doyle,  p.  353. 

United  States  v.  Guggenheim  Exploration  Co.,  p.  544. 
Hay,  Collector,  v.  Gauley  Mountain  Coal  Co.,  p.  254. 

Excess  of  the  sale  price  over  value  on  January  1,  1909,  was,  however, 
held  to  be  taxable  income,  even  though  the  sale  price  was  less  than  the 
purchase  price. 

Great  Northern  Trust  Co.  v.  Lynch,  Collector,  p.  241. 

Profits  on  sale  of  property  are  to  be  determined  not  by  bookkeeping 
facts  but  by  real  facts. 

United  States  v.  Guggenheim  Exploration  Co.,  p,  544, 

In  computing  the  cost  of  bonds  for  the  purpose  of  determining  taxable 
profit  thereon,  interest  from  date  of  payment  to  date  of  receipt  of  bonds, 
which  was  not  in  fact  paid,  may  not  be  included, 
Walsh  V.  Brewster,  p.  592. 

Where  there  is  no  established  market  to  serve  as  a  guide,  the  question 
of  value  on  March  1,  1913,  even  of  tangible  assets,  is  one  largely  of  judg- 
ment and  opinion,  and  the  same  is  even  more  true   of  intangible  assets. 
Several  methods  are  suggested  which  may  be  utilized. 
A.  E.  M.  34,  p.  682. 

For  the  purpose  of  determining  the  fair  market  value  of  stock  on  March 
1,  1913,  market  quotations  as  of  that  date  must  be  used  rather  than  book 
values  of  the  assets. 

A.  E,  E.  33,  p.  625. 

In   determining  profit  upon  property  which  is  not   depreciable   under 
income  tax  laws,  the  question  of  depreciation  does  not  enter  in. 
A.  E.  E.  249,  p.  650. 


784  545  U.  S.  TAX  CASES 

In  computing  the  cost  of  stock  upon  which  a  stock  dividend  has  been 
issued,  or  of  the  dividend  stock,  each  purchase  must  be  treated  separately. 
Towne  v.  McEUigott,  Collector,  p.  501. 

Where  a  corporation  gives  each  shareholder  a  right  to  purchase  new 
shares  in  proportion  to  the  number  of  old  shares  owned  by  him,  at  one-half 
of  par,  the  profit  from  the  sale  of  the  new  stock  should  be  determined  by 
prorating  the  entire  cost  of  the  old  and  new  stock. 
A.  E.  M.  128,  p.  702. 

On  the  sale  of  stock  rights,  cost  and  selling  price  are  determined  by 
assuming  that  the  stockholder,  instead  of  selling  his  rights,  subscribed  for 
new  shares  and  sold  them,  and  the  gain  taxable  to  a  stockholder  who  sells 
his  rights  is  equal  to  the  gain  taxable  to  a  stockholder  who  subscribes  for 
new  shares  and  sells  his  new  shares. 

Miles,  Collector,  v.  The  Safe  Deposit  &  Trust  Co.  of  Baltimore, 
Guardian,  p.  941;  af&rming  case  below,  p.  439. 

(c)    Beorgauizations  and  Exchange  of  Property 

Where  stock  in  a  reorganized  corporation  is  received  in  exchange  for 
stock  of  the  old  company,  there  is  a  closed  transaction  which  may  result  in 
taxable  profit,  under  the  Act  of  1916,  even  though  the  beneficial  interest  re- 
mains the  same. 

A.  R.  M.  67,  p.  693. 

NOTE. — This  ruling  is  superseded  by  the  express  exemption  in  the  Act 
of  1921,  section  202  (c)  (2). 

If,  upon  the  sale  of  capital  assets  of  a  corporation  to  another  corpora- 
tion, shares  of  stock  are  surrendered  by  the  old  stockholders  to  the  vendor 
corporation,  the  nature  of  the  transaction  is  not  thereby  changed  from  one 
of  the  sale  by  the  corporation  to  one  of  sale  of  stock  by  the  stockholders. 
A.  E.  M.  21,  p.  678. 

A  bona  fide  exchange  of  stocks  for  other  property  is  not  a  sale  thereof 
from  which  profits  are  derived  liable  to  taxation  as  income  under  Acts  from 
August  5,  1861,  to  March  2,  1867. 

United  States  v.  Smith,  p.  573. 

(4)    ^terest  Beceived 

Taxes  upon  interest  accruing  upon  bonds  containing  tax-free  covenants 
withheld  and  paid  by  the  corporate  obligor  constitutes  taxable  income  of 
the  obligee. 

Massey  v.  Lederer,  Collector,  p.  934. 

Interest  paid  by  tenant  companies  in  behalf  of  the  lessor  company  is 
taxable  income  of  the  latter. 

Houston  Belt  &  Terminal  Co.  v.  United  States,  p.  265. 

Under  a  state  act,  money  received  by  a  pawnbroker  by  way  of  interest 
on  loans  made  by  him  was  held  to  be  taxable  as  interest  received  from 
money  at  interest,  and  not  as  income  derived  from  a  business. 
Goldman  v.  Trefry,  p.  233. 

Money  owing  to  a  taxpayer  is  income  accrued  from  the  time  when  the 
liability  to  pay  becomes  absolute,  although  it  is  not  yet  due,  and  so,  interest 
on  corporate  bonds  due  March  1,  1913,  does  not  constitute  taxable  income 
under  the  Act  of  October  3,  1913. 

Plant  V.  Walsh,  Collector,  p.  961. 


545  U.  S.  TAX  CASES  785 

Interest  accrued  but  not  actually  collected  was  not  income  under  the 
1909  act. 

Walker,  Collector,  v.  Gulf  &  I.  'By.  Co.  of  Texas,  p.  591. 

Interest  which  accrued  prior  to  1909  but  was  paid  in  1911  is  not  income 
within  the  provisions  of  the  Act  of  Aug.  5,  1909. 

Northern  Pacific  Eailway  Co.  v.  Lynch,  p.  375. 

(5)    Dividends 
(a)  Dividends  Held  Taxable 
Dividends  held  taxable  even  though  paid  from  earnings  or  surplus  ac- 
cumulated prior  to  the  effective  date  of  the  statute. 
Lynch,  Collector,  v.  Hornby,  p.  321. 
Union  Pacific  Coal  Co.  v.  Skinner,  p.  515. 
State  ex  rel.  Sallie  F.  Moon  Co.  v.  Wisconsin  Tax  Commission, 

p.  484. 
Van  Dyke  v.  City  of  Milwaukee,  p.  584. 
United  States  v.  Philadelphia  B.  &  W.  Ey.  Co.,  p.  561. 

Dividends  received  upon  stocks  of  corporations  conclusively  presumed 
to  be  earnings  or  profit  and  therefore  "income"  under  a  state  act. 
State  ex  rel.  Pfister  v.  Widule,  p.  481. 
Van  Dyke  v.  City  of  Milwaukee,  p.  584. 

A  state  tax  on  money  received  as  dividends  held  valid  as  a  property 
tax  and  not  as  an  income  tax. 

Loring  v.  City  of  Beverly,  p.  315. 

Distributions  to  depositors  of  profits  of  a  bank  are  dividends  and  not 
interest. 

Cary  v.  Savings  Union,  p.  129. 

Tax  on  dividends  not  unconstitutional  because  corporation  also  taxed 
on  property  and  franchises. 

Wells  ads.  Alderman,  p.  599. 

Dividends  received  on  stock  of  a  corporation,  the  sole  income  of  which 
consists  of  dividends  of  another  corporation,  may  be  taxed. 
State  ex  rel.  Moon  et  al.  v.  Nygaard,  p.  470. 

(b)    Non-Taxable  Distributions 

Corporate  dividends  declared  prior  to  March  1,  1913,  and  payable  sub- 
sequent to  that  date,  do  not  constitute  taxable  income  to  taxpayers  receiving 
the  same. 

United  States  v.  Guinzburg,  p.  991. 

Plant  V.  Walsh,  Collector,  p.  961. 

Dividends  declared  from  profits  accumulated  prior  to  the  act  are  not 

Merchants  Insurance  Co.  v.  McCartney,  Collector,  p.  344. 

Bailey,  Collector,  v.  Eailroad  Co.,  p.  82. 
Earnings  and  surplus  accumulated  previous   to   the  taxable  year  and 
taken  over  by  a  holding  company  are  not  taxable  as  dividends  received  by 
the  latter.      ^^^^  ^.^  ^.^^.^^  ^^  Lewellyn,  p.  243. 

A  distribution  by  a  corporation  of  income  which  resulted  from  the 
payment  of  a  claim  for  damages  which  arose  prior  to  March  1,  1913,  is  not 
a  taxable  dividend. 

Park  V.  Gilligan,  p.  393. 


786  545  U.  S.  TAX  CASES 


Where  a  dividend  is  a  mere  bookkeeping  act,  the  corporation  declaring 
it  and  the  one  receiving  it  being  in  substance  identical,  it  is  not  taxable. 
Southern  Pacific  Co.  v.  Lowe,  p.  456. 

Dividends  declared  from  profits  of  a  corporation  already  taxed  are  not 
again  taxable  in  the  hands  of  the  recipient. 

Merchants  Insurance  Co.  v.  McCartney,  p.  344. 

Undistributed  earnings  of  a  corporation  are  not  taxable  to  the  stock- 
holders. Ex  Parte  Ives,  p.  205. 

Dividends  received  by  a  partner,  on  stock  owned  by  the  partnership, 
need  not  be  included  in  his  individual  return  as  income  subject  to  normal  tax. 
United  States  v.  Coulby,  p.  533. 

(c)    Liquidation  Dividends 

A  liquidation  dividend  which  distributes  the  realization  of  an  increase 
in  value  of  property  accruing  prior  to  March  1,  1913,  is  not  taxable. 
Lynch,  Collector,  v.  Turrish,  p.  322. 

Where  a  corporation  distributes  a  dividend  consisting  only  of  earnings 
or  profits,  prior  to  any  vote  or  resolution  provided  for  liquidation  of  the 
company,  such  dividends  cannot  be  regarded  as  liquidating  dividends  despite 
the  fact  that  the  stockholders  of  the  company  subsequently  voted  to  go  into 
liquidation  and  distribute  its  remaining  capital. 
A.  B.  M.  93,  p.  694. 

(d)    Stock  Dividends 

Stock  dividends  are  not  taxable,  because  not  income. 
Eisner,  Collector,  v.  Macomber,  p.  196. 
Towne  v.  Eisner,  Collector,  p.  500. 
United  States  v.  Philadelphia  B.  &  W.  E.  Co.,  p.  561. 

Stock  dividends  are  taxable  income  under  the  Wisconsin  Income  Tax 
Act  and  State  Constitution. 

State  ex  rel.  Duhaney  v.  Nygaard,  p.  985. 

Where  a  new  corporation  was  formed  with  the  same  stockholders  as  a 
corporation  already  existing,  and  stock  of  the  new  corporation  was  distrib- 
uted to  the  stockholders  of  the  old,  held  that  this  distribution  was  not  a 
stock  dividend  but  constituted  taxable  income  of  the  recipient. 

United  States  v.  Phellis,  p.  994;  reversing  case  below,  p.  404. 

Where  a  new  corporation  was  organized  to  hold  property  which  had 
represented  surplus  of  an  existing  corporation  and  the  stock  of  the  new 
corporation  is  distributed  directly  to  the  stockholders  of  the  old,  the  distri- 
bution is  a  taxable  dividend. 

Eockefeller   v.   United    States,   p.    970;    affirming   case   below, 
p.  367. 

Stock  received  by  a  stockholder  of  a  corporation  as  a  bonus  for  a  stock 
subscription  held  not  taxable  income. 

United  States  v.  Mellon,  p.  992;  affirming  case  below,  p.  551. 

Cash  and  shares  of  stock  received  by  a  shareholder  in  full  settlement 
of  dividends  in  arrears  on  cumulative  preferred  stock  held  to  constitute  a 
dividend  under  a  state  income  tax  law. 
Wilder  v.  Trefry,  p.  607. 


545  U.  S.  TAX  CASES  787 

(e)    Dividends  Paid  in  Property 

A  distribution  of  stock  of  another  corporation  is  not  a  stock  dividend, 
and  is  taxable. 

Peabody  v.  Eisner,  Collector,  p.  394. 

Dividends  paid  in  debenture  bonds  of  the  corporation  are  taxable  in- 
come to  the  recipients. 

Doerschuck  v.  United  States  of  America,  p.  183. 

Scrip  dividends  were  taxable  under  the  Act  of  June  30,  1864. 
Bailey,  Collector,  v.  Eailroad  Co.,  p.  82. 

(6)    Bents  and  Boyalties 

An  income  tax  upon  rentals  is  not  a  tax  upon  the  property  rented. 
Rensselaer  &  S.  E.  Co.  v.  Delaware  &  H.  Co.,  p.  427. 

Where  a  film  corporation  agreed  to  pay  to  certain  manufacturers  of 
moving  picture  films,  who  were  the  holders  of  all  its  common  stock,  for  the 
use  of  their  films,  the  balance  of  its  net  profits  after  deducting  certain 
percentages  for  dividends  on  its  stock,  such  payments  were  held  to  be  rent 
and  not  payments  in  the  nature  of  dividends. 

In  re  General  Film  Corporation,  p.  901. 

Rent  paid  direct  to  its  stockholders,  instead  of  to  the  lessor  corporation, 
is  income  of  the  latter. 

Anderson  v.  Morris  E.  E.  R.  Co.  et  al.,  p.  75. 
West  End  St.  Ey.  Co.  v.  Malley,  Collector,  p.  600. 
Blalock  V.  Georgia  Ry.  &  Electric  Co.  p.  96. 

Royalties  received  by  the  owner  of  a  mine  are  income,  and  not  the 
proceeds  of  property  sold. 

Von  Baumbach,  Collector,  v.  Sargent  Land  Co.,  p.  590. 
Pfister  Land  Co.  v.  City  of  Milwaukee,  p.  402. 

A  covenant  by  a  lessee  to  pay  taxes  held  not  to  include  the  income  tax 
on  rentals  received  by  the  lessor. 

Codman  v.  American  Piano  Co.,  p.  145. 

Catawissa  R.  Co.  v.  Philadelphia  &  R.  Ey.  Co.,  p.  131. 

Little  Schuylkill,  etc.,  Co.  v.  Philadelphia  &  Reading  Ry.  Co., 

p.  313. 
Van  Rensselaer  v.  Dennison,  p.  585. 

Other  leases  construed  to  require  such  payment  by  the  lessee. 

North  Pennsylvania  R.  Co.  v.  Philadelphia  &  R.  Ry.  Co.,  p.  374. 
Suter  V.  Jordan  Marsh  Co.,  p.  497. 
Ehrlich  et  al.  v.  Brogan  et  al.,  p.  195. 

(7)    Miscellaneous  Forms  of  Income 

Debts  of  a  railroad  company  written  off  by  it  because  outlawed  are  in- 
come to  the  company  for  the  year  in  which  written  off. 

Great  Northern  Trust  Co.  v.  Lynch,  Collector,  p.  241. 

Where  the  sole  stockholder  of  a  corporation  released  a  debt  which  the 
corporation  owed  him,  the  amount  thereof  was  held  to  be  a  contribution  of 
capital,  and  not  income. 

United   States   v.   Oregon-Washington   Railroad   &   Navigation 
Co.,  p.  558. 


788  545  U.  S.  TAX  CASES 

Where  bonds  are  redeemed  for  less  than  their  par  value  for  which  they 
were  issued,  the  difference  is  taxable  income  to  the  corporation  for  the  year 
in  which  redemption  is  made,  despite  the  fact  that  the  market  value  of  the 
bonds  was  no  greater  on  March  1,  1913,  than  when  redeemed. 
A.  E.  E.  545,  p.  675. 

A  building  erected  by  a  lessee  held,  under  the  terms  of  the  lease,  to  have 
become  income  of  the  lessor  in  the  year  when  erected,  and  not  in  the  year 
when  the  lessor  acquired  possession  of  the  same. 

Miller  v.  Gearin,  p.  351. 

Cryan  v.  Wardell,  Collector,  p.  163. 

(D)    Deductions  From  Gross  Income 

(1)    Expenses  of  Carrying  on  Business 

(a)    Nature  of  Expense 

By  the  operating  expenses  of  a  railroad  company  is  meant  the  payment 
for  labor  and  materials  which  go  into  the  actual  operating  of  the  road 
and  property. 

Grand  Eapids  &  Indiana  Ry.  Co.  v.  Doyle,  Collector,  p.  238. 

A  corporation  may  not  deduct  money  advanced  to  a  subsidiary  company 
to  pay  the  latter 's  operating  expenses. 

Walker  v.  Gulf  &  I.  Ey.  Co.  of  Texas,  p.  591. 

(b)    Business  and  Personal  Expenses  Contrasted 

A  lawyer,  acting  as  the  executor  in  a  single  estate,  is  not  conducting  a 

"trade   or  business";   a  single,  isolated  activity  of   the  character  of  an 

executorship  does  not  constitute  a  trade,  business,  profession  or  vocation. 

Lederer,  Collector,  v.  Cadwalader,  p.  920;  affirming  case  below, 

p.  617. 

Such  portion  of  the  upkeep  and  operating  expenses  of  the  taxpayer's 
automobile  as  is  occasioned  by  its  use  in  his  business  is  a  proper  deduction 
as  a  business  expense. 

A.  E.  E.  266,  p.  654. 

Losses  incurred  in  operation  of  a  farm  during  period  of  administration 
of  an  estate  are  deductible  though  the  farm  was  operated  by  decedent  as  a 
hobby,  and  though  similar  losses,  if  incurred  in  his  lifetime,  would  not  have 
been  deductible. 

A.  E.  E.  249,  p.  650. 

A  person  cultivating  and  operating  a  farm  for  recreation  or  pleasure, 
other  than  on  the  recognized  principles  of  farming,  is  not  engaged  in  the 
business  of  farming. 

Fish  V.  Irwin,  p.  216. 

The  mere  fact  that  a  heavy  loss  is  incurred  in  the  initial  stages  of 
operating  a  farm  does  not  necessarily  show  that  the  farm  is  operated  for 
pleasure,  and,  even  if  this  is  not  so,  farming  when  engaged  in  as  a  regular 
occupation  and  in  accordance  with  recognized  business  principles  is  none 
the  less  a  business  because  the  person  engaging  in  it  is  willing  to  do  so 
without  regard  to  its  profitableness  because  of  the  pleasure  derived  from  it. 
Plant  V.  Walsh,  Collector,  p.  961. 

Alimony  paid  is  not  deductible. 
Gould  V.  Gould,  p.  237. 


545  U.  S.  TAX  CASES  789 

(c)    Permanent  Investments 
Expenditures  by  a  public  utility  company  for  new  service  connections 
and  extensions  are  a  permanent  investment  in  improvements  and  are  not 
deductible,     ^t^j^j^  Hollywood  Water  Co.  v.  Carter,  Collector,  p.  514. 

The  excess  of  the  cost  of  new  equipment  over  old  and  the  cost  of  addi- 
tional equipment  represents  an  addition  to  the  value  of  property  and  is  not 
deductible  as  expense. 

Grand  Eapids  &  Indiana  Ry.  Co.  v.  Doyle,  Collector,  p.  238. 

In  re  Income  Tax  Appeal  Cases,  p.  270. 

Cost  of  new  buildings  for  laborers '  quarters  is  not  a  deductible  expense. 
In  re  Income  Tax  Appeal  Cases,  p.  270. 

In  computing  net  income  no  deduction  shall  be  allowed  on  account  of 
expenditures  for  new  buildings,  or  for  permanent  improvements  or  better- 
ments. Kemper  Military  School  v.  Crutchley,  p.  281. 

The  expense  of  clearing  new  land  for  raising  a  crop  of  sugar  in  a  future 
year  is  not  deductible  for  the  year  in  which  incurred. 
In  re  Income  Tax  Appeal  Cases,  p.  270. 

Amounts  expended  by  a  surveyor  in  buying  instruments  and  books  are 
not  necessary  expenses  in  carrying  on  his  business. 
In  re  Smith,  p.  455. 

Attorneys'  fees  paid  in  litigation   for  the   mastery  of   certain   stock, 

resulting  in  practically  the  ownership  or  control  thereof  and  the  consequent 

management  of  a  company,   constitute  a  capital  investment,  and  are  not 

deductible  from  income  derived  from  such  business  as  a  necessary  expense. 

Laemmle  v.  Eisner,  Ex-Collector,  p.  917. 

Amounts  expended  by  a  corporation  after  acquisition  of  a  patent,  in 
defending  its  title,  are  not  a  part  of  the  cost  of  the  property  and  so  are 
deductible  as  a  business  expense. 
A.  E.  E,  98,  p.  635. 

Premiums  paid  by  a  corporation  for  insurance  on  the  lives  of  its  officers 
or  employees  payable  to  the  corporation  cannot  be  deducted  as  expenses. 
A.  R.  E.  229,  p.  649. 

(d)    Activities  Other  Than  Business 

A  lawyer  who  happens  to  be  an  executor  and  trustee  of  a  deceased 
friend  is  not  engaged  in  the  business  of  acting  as  a  fiduciary. 

Lederer,  Collector,  v.  Cadwalader,  p.  920;  affirming  case  below, 
p.  617. 

(2)    Inventories 

Transactions  in  "futures"  unclosed  at  the  end  of  the  taxable  year  form 
no  integral  part  of  the  cost  of  the  commodities  included  in  the  taxpayer's 
physical  inventory. 

x\.  E.  M.  100,  p.  697. 

Carrying  charges  actually  paid  or  accrued  on  liquor  in  bond  are,  under 
certain  circumstances  proper  additions  to  the  cost  price  of  such  liquor  for 
the  purpose  of  inventory. 

A.  E.  E.  140,  p.  642. 


790  545  U.  S.  TAX  CASES 

Goods  sold  in  one  year  and  taken  back  in  the  following  year  may  not 
be  included  in  the  seller's  closing  inventory  for  the  year  of  sale;  the  loss 
is  one  for  the  year  in  which  the  goods  were  returned  and  not  for  the  year 
of  sale. 

A.  E.  R.  155,  p.  642. 

A.  E.  M.  129,  p.  703. 

Monthly  average  cost  method  of  taking  inventory  in  the  tobacco  indus- 
try is  recognized  and  permitted,  since  no  other  method  more  nearly  approach- 
ing theoretical  accuracy  is  practically  possible. 
A.  E.  E.  18,  p.  622. 
There  is  no  warrant  in  the  law  for  permitting  liquor  dealers  to  inven- 
tory their  stock  on  December  31,  1919,  at  nothing  for  income  tax  purposes 
with  the  understanding  that  should  the  goods  be  sold  later  the  full  amount 
received  therefrom  must  be  treated  as  income. 
A.  E.  M.  33,  p.  681. 

A  taxpayer  is  bound  by  the  option  he  has  exercised  in  prior  years  of 
including  excise  taxes  in  the  cost  of  merchandise  in  calculating  his  inven- 
tory, rather  than  to  charge  them  to  business  expense. 
A.  E.  M.  121,  p.  678. 
When  change  of  basis  of  pricing  inventories  will  be  permitted,  and 
effect  of  change  on  prior  returns  considered. 
A.  E.  M.  38,  p.  687. 


(3) 

Salaries 

For 

cases  1 

dealing 

;  with 

the  reasonableness  of 

particular  salary 

deduc- 

tions  see 

the  following: 

A. 

E. 

M. 

39, 

P- 

688. 

V 

A. 

E. 

M. 

30, 

P- 

681. 

A. 

E. 

E. 

223, 

P- 

648. 

A. 

E. 

E. 

390, 

,  p. 

,  668. 

A. 

E. 

E. 

435, 

P- 

670. 

A.  E. 

E. 

519. 

,  p. 

,  674. 

The  government  does  not  have  the  right  to  inquire  into  and  determine 
whether  a  salary,  paid  by  a  corporation  and  deducted  in  its  return,  is  rea- 
sonable and  fair  compensation  for  the  services  rendered,  but  it  may  show, 
not  that  the  salary  is  too  high,  but  that  the  whole  or  some  part  of  it  is  not 
salary  at  all,  but  is  profit  diverted  to  a  stockholding  officer  under  the  guise 
of  salary  and  as  such  is  subject  to  taxation. 

United  States  v,  Philadelphia  Knitting  Mills  Co.,  p.  563. 

"When  the  evidence  for  the  government  is  sufficient  to  sustain  a  -finding 
by  fair-minded  men  that  a  part,  and  a  definite  part,  of  compensation  paid 
to  an  officer  as  salary  was  really  profits  distributed  by  reason  of  his  stock- 
holding, a  prima  facie  case  for  the  jury  has  been  established. 

United  States  v.  Philadelphia  Knitting  Mills  Co.,  p.  563. 

Amounts  paid  by  a  corporation  to  stockholding  employees  on  the  basis 
of  the  stockholdings  of  the  parties  and  in  addition  to  salaries  of  fixed 
amounts  cannot  be  allowed  as  salary  deductions  but  must  be  treated  as 
dividends.      Jacobs  &  Davies,  Inc.  v.  Anderson,  Collector,  p.  274. 

Additional  compensation  fixed  in  a  year  subsequent  to  year  in  which 
services  were  rendered,  is  deductible  for  year  in  which  paid  and  not  for 
year  when  services  were  rendered. 
A.  E.  E.  232,  p.  650. 
A.  E.  E.  519,  p.  674. 


545  U.  S.  TAX  CASES  791 

(4)    Bepairs,  Benewals,  and  Beplacements 

Maintenance  means  the  upkeep  or  preserving  of  the  condition  of  the 
property  to  be  operated. 

Grand  Eapids  &  Indiana  Railway  Co.  v.  Doyle,  Collector,  p.  238. 

Annual  replacements  on  account  of  wear  and  tear  should  properly  be 
charged  to  maintenance. 

Mutual  Benefit  Life  Ins.  Co.  v.  Herold,  Collector,  p.  355. 

An  insurance  company  may  deduct  from  gross  income  the  amount 
expended  for  alteration  of  its  home  office. 

Eaton,  Collector,  v.  Connecticut  General  Life  Ins.  Co.,  p.  189. 

(5)    Reserves  of  Insurance  Companies 
The  deduction  of  the  net  addition  to  a  reserve  fund  required  by  law, 
which  is  allowed  to  insurance  companies,  may  include  a  reserve  based  upon 
the  value  of  policies  on  which  the  premiums  are  due  and  uncollected. 
Prudential  Ins.  Co.  v.  Herold,  Collector,  p.  414. 

Since  certain  supplementary  policy  contracts  were  required  by  law  to 
be  represented  in  a  reserve  fund,  so  much  of  the  fund  as  is  annually  set 
apart  for  that  purpose  is  deductible  by  an  insurance  company. 

Mutual  Benefit  Life  Ins.  Co.  v.  Herold,  Collector,  p.  355. 

Additions  to  reserve  fund  of  an  insurance  company  because  of  liability 
on  supplementary  contracts  not  involving  life  contingencies  are  not  deducti- 
ble under  the  statute  because  not  required  by  law. 

Fink,  Collector,  v.  Northwestern  Mut.  Life  Ins.  Co.,  p.  210. 

Additions  to  reserves  held  against  losses,  incurred  and  contingent,  were 
not  required  by  law,  and  therefore,  were  not  deductible  by  an  insurance 
company.       McCoaeh,  Collector,  v.  Insurance  Company  of  North  America, 
p.  338. 
National  Life  &  Accident  Ins.  Co.  v.  Craig,  Collector,  p.  361. 

A  reserve  for  the  running  expenses  of  the  business  is  not  a  reserve 
required  by  law,  and  so  additions  to  such  a  reserve  are  not  deductible. 
Maryland  Casualty  Co.  v.  United  States,  p.  332. 

(6)    Interest 
When  an  act  by  specific  provision  places  a  limitation  upon  the  amount 
of  interest  which  may  be  deducted,  an  additional  deduction  cannot  be  sus- 
tained under  another  section  as  an  ordinary  and  necessary  expense. 
Anderson,  Collector,  v.  Forty-two  Broadway  Co.,  p.  74. 
Middlesex  Banking  Co.  v.  Eaton,  Collector,  p.  350. 

Interest  paid  by  a  stockbroker  on  money  borrowed  to  buy  and  carry 
securities  for  customers,  who  in  turn  paid  interest  on  their  indebtedness 
to  it,  held  to  be  interest  paid  on  an  indebtedness  of  the  broker  and  not  on 
indebtedness  of  the  customers. 

Altheimer  &  Rawlings  Inv.  Co.  v.  Allen,  Collector,  p.  67. 

"Where  interest  upon  an  old  note  has  been  capitalized  by  giving  a  new 
note  representing  principal  and  accrued  interest  on  the  old  note,  only  the 
interest  accrued  upon  the  new  note  is  an  allowable  deduction. 
A.  R.  R.  113,  p.  638. 

Where  bonds  are  issued  by  a  corporation  at  a  discount,  the  total  amount 
of  the  discount  may  not  be  deducted  in  the  year  of  issue  but  must  be  pro- 
rated over  the  life  of  the  bonds. 

Baldwin  Locomotive  Works  v.  McCoach,  Collector,  p.  83. 


792  545  U.  S.  TAX  CASES 

Sums  of  money  reserved  and  set  aside  each  year  by  a  corporation  as  the 
pro  rata  amount  of  a  discount  on  bonds  issued  by  it  cannot  be  deducted 
under  the  Act  of  August  5,  1909,  for  such  amounts  do  not  represent  losses 
actually  sustained  within  the  year. 

Southern  Pac.  R.  Co.  v.  Muenter  et  al.,  p.  457. 

Where,  prior  to  1909,  a  corporation  issued  its  bonds  at  a  discount  and 
charged  off  the  entire  loss  on  its  books,  it  was  held  that  it  could  not  in  a 
later  year  re-open  its  books  and  make  a  deduction  for  a  proportionate 
amount  of  the  loss. 

Chicago  &  Alton  E.  E.  Co.  v.  United  States,  p.  137. 

(7)  Taxes 

A  tax  does  not  accrue  until  it  becomes  a  liability  to  the  taxpayer  and, 
therefore,  an  additional  state  tax  upon  income  of  a  corporation,  levied 
under  a  law  enacted  in  1919,  on  the  basis  of  its  income  tax  return  for  the 
year  1918  is  not  an  allowable  deduction  in  a  federal  income  tax  return  for 
the  calendar  year  1918. 

Schuster  &  Company,  Inc.,  v.  Williams,  Collector,  p.  974. 

The  federal  estate  tax  paid  by  the  executors  of  an  estate  is  an  allow- 
able deduction  in  ascertaining  the  net  taxable  income  of  the  estate. 
United  States  v.  Woodward,  p.  580. 

But  it  is  not  an  allowable  deduction  in  ascertaining  the  net  taxable  in- 
come of  the  decedent  in  the  return  filed  for  him  by  the  executors  of  his 
estate. 

Catherwood  v.  United  States,  p.  858, 

An  inheritance  tax  paid  by  a  legatee  under  a  state  act  is  not  a  proper 
deduction  in  the  return  of  the  legatee. 
Prentiss  v.  Eisner,  p.  413. 

A  corporation  may  not  deduct  taxes  paid  in  its  behalf  by  another  cor- 
poration when  it  has  not  included  the  amount  thereof  in  its  gross  income. 
United  States  v.  Aetna  Life  Ins,  Co.,  p.  519. 

Taxes  levied  upon  the  shares  of  stock  in  banks  and  other  corporations, 
which  the  corporation  is  required  to  pay  on  behalf  of  the  shareholders,  may 
not  be  deducted  from  the  income  of  the  corporation, 
Elliott  National  Bank  v.  Gill,  p.  199, 
First  National  Bank  of  Jackson  v,  McNeel,  p,  214, 
Northern  Trust  Co.  v.  McCoach,  Collector,  p.  378. 

If,  however,  the  primary  obligation  of  the  tax  is  upon  the  corporation, 
it  is  deductible. 

United  States  v.  Guaranty  Trust  &  Savings  Bank,  p.  542. 

A  citizen  of  the  United  States  resident  in  the  Philippine  Islands  is 
entitled  to  a  credit  for  the  amount  of  taxes  paid  to  the  Philippine  Islands 
during  the  year. 

Lawrence  v.  Wardell,  Collector,  p.  304. 

(8)  Losses 

(a)    Losses  Incurred  in  Trade  or  Business 
The  phrase  "losses  incurred  in   trade"  relates  only  to  losses  in  the 
actual  business   of  the  taxpayer,  as  distinguished  from  losses  in  isolated 
transactions  entered  into  for  profit  but  not  connected  with  his  business. 
Mente  v.  Eisner,  p  343. 


545  U.  S.  TAX  CASES  793 

Where  a  taxpayer,  although  engaged  in  other  business,  made  a  profit 
from  speculation  in  stock,  which  profit  was  embezzled  by  a  broker,  held 
that  he  was  entitled  to  a  deduction  for  such  loss  as  a  loss  incurred  in  trade 
or  business. 

Black  V.  Bolen,  Collector,  p.  95. 

Losses  incurred  through  accepting  stock,  which  subsequently  became 
worthless,  in  exchange  for  various  materials  and  claims  of  the  taxpayer, 
held  deductible  as  losses  incurred  in  trade. 

Bryce  et  al.  v.  Keith,  Collector,  p.  115. 

Loss  upon  sale  of  an  individual's  residence  is  not  deductible. 
A.  E.  R.  249,  p.  650. 

The  same  was  held,  even  though  the  sale  was  caused  by  the  taxpayer's 
acceptance  of  a  business  position  in  a  different  part  of  the  country. 
A.  R.  E.  96,  p.  634. 

(b)    Other  Losses 
Where  old  buildings  are  abandoned  for  newer  ones  but  are  left  stand- 
ing, no  deductible  loss  arises. 

Hawaiian  Commercial  &  Sugar  Co.  v.  Tax  Assessor  &  Collector, 
p.  251. 

Where  a  steamer  was  condemned  by  federal  inspectors  and  subsequently 
broken  up  and  sold  for  a  small  sum,  held  that  the  entire  difference  between 
its  original  cost  and  selling  price  was  not  deductible  as  a  loss  for  the  year 
of  sale. 

In  re  Wilder 's  Steamship  Co.,  p.  605. 
In  determining  whether  or  not  a  debt  is  worthless,  the  taxpayer  need 
only  exercise  his  discretion  fairly  and  honestly;  a  suit  at  law  or  in  equity 
for  ascertaining  the  debt  to  be  worthless  is  unnecessary. 
United  States  v.  Frost,  p.  539. 
The  amounts  at  which  debts  stand  on  the  books  of  the  taxpayer  at  a 
given  time  are  at  least  prima  facie  evidence  of  their  actual  value  at  that 
time. 

Plant  V.  Walsh,  Collector,  p.  961. 

Where  a  corporation  distributes,  in  the  form  of  a  dividend,  certain  secur- 
ities held  by  it,  there  is  a  deductible  loss  in  case  the  value  of  the  securities 
at  that  time  is  less  than  their  value  when  acquired,  or  their  value  on  March 
1,  1913.  A.  E.  E.  435,  p.  670. 

(c)    When  Losses  Are  Deductible 
A  loss  suffered  in  one  year  through  a  destruction  of  property  but  not 
deducted  because  of  absence  of  any  net  income  for  that  year,  cannot  be 
deducted  in  a  subsequent  year  when  the  property  destroyed  is  replaced. 
A.  E.  E.  97,  p.  635. 
A  taxpayer  who  bought  a  guano  bed  and  years  later  discovered  it  con- 
tained only  one-half  of  what  it  had  been  estimated   to   contain,  held  not 
entitled  to  a  deduction  for  a  loss  in  the  year  of  such  discovery. 
In  re  Pacific  Guano  &  F.  Co.,  p.  390. 
A  loss  through  burglary  is  deductible  only  in  the  year  in  which  sus- 
tained, and  the  matter  of  litigation  upon  insurance  policies  with  respect  to 
liability  for  such  loss  can  have  no  effect  upon  the  time  when  the  loss  was 
actually  sustained. 

A.  E.  E.  542,  p.  674. 


794  545  U.  S.  TAX  CASES 

The  actual  value  of  a  debt  on  March  1,  1913,  does  not  control  the 
amount  of  the  deduction  allowed  to  the  taxpayer  where  such  debt  is  subse- 
quently ascertained  to  be  worthless  and  charged  off. 
Plant  V.  Walsh,  CoUector,  p.  961. 

(9)    Depreciation 
(a)    Definition 

Depreciation  of  a  building  means  physical  deterioration;  it  does  not 
take  into  account  depreciation  in  value  due  to  a  loss  in  rental  value  because 
of  the  construction  of  more  modern  buildings  with  improved  facilities,  or 
due  to  a  change  in  the  neighborhood. 

Cohen  v.  Lowe,  Collector,  p.  147. 
Depreciation  is  not  to  be  confused  with  ordinary  repairs;  it  is  intended 
to  cover  the  estimated  lessening  in  value  of  the  original  property  due  to 
wear  and  tear,  decay  or  gradual  decline  from  natural  causes,  which  at  some 
time  in  the  future  will  require  the  abandonment  or  replacement  of  the  prop- 
erty, in  spite  of  current  ordinary  repairs. 

San  Francisco  &  P.  S.  S.  Co.  v.  Scott,  Collector,  p.  441. 
If,  due  to  repairs  and  renewals,  the  value  of  property  at  the  end  of  the 
year  is  as  great  as  at  the  beginning,  there  is  no  depreciation  in  value  within 
the  meaning  of  the  law. 

Nashville,  Chat.  &  St.  Louis  Eailway  Co.  v.  U.  S.,  p.  358. 
A  railroad  company  is  not  entitled  to  a  deduction  for  depreciation  suf- 
fered by  individual  units  of  property,  where  such  depreciation  is  fully  over- 
come by  appreciation  in  other  units,  so  that  at  the  end  of  the  year  the 
railroad  is  as  valuable  as  at  the  beginning  of  the  year, 

Nashville,  Chat.  &  St.  Louis  Eailway  Co.  v.  U.  S.,  p.  358. 
A  corporation  cannot  be  denied  a  deduction  on  account  of  depreciation 
actually  sustained  and  charged  off,  even  though  after  paying  dividends  there 
remains  an  amount  of  surplus  and  earnings  insufficient  to  cover  depreciation. 
A.  E.  M.  112,  p.  702. 
The  term  "depreciation"  does  not  include  depletion  of  mines. 
Pfister  Land  Co.  v.  City  of  Milwaukee,  p.  402. 
Stratton's  Independence  v.  Howbert,  p.  493. 
Von  Baumbach,  Collector,  v.  Sargent  Land  Co.,  p.  590. 
A  lessee  of  a  mine  paying  a  royalty  is  not  entitled  to  deduct  from  gross 
income  depreciation  for  ore  mined,  in  addition  to  sums  paid  as  royalties. 
Klar  Piquett  Mining  Co,  v.  Town  of  Platteville,  p.  288. 
Amortization  of  bonds  does  not  come  within  any  definition  of  deprecia- 
tion as  used  in  the  statute. 

Fink,  Collector,  v.  Northwestern  Mut.  Life  Ins,  Co,,  p,  210. 
Shrinkage  in  market  value  of  securities  held  to  be  depreciation  within 
the  meaning  of  the  Act  of  August  5,  1909. 

New  York  Life  Insurance  Co.  v.  Anderson,  p.  363. 

(b)  Bates  of  Depreciation 
The  annual  depreciation  of  a  building  is  an  amount  represented  by  a 
fraction  having  one,  the  tax  year,  for  the  numerator,  and  the  number  of 
years  representing  the  ascertained  life  of  the  building  as  the  denominator; 
this  assumes  that  there  would  be  an  average  deterioration  suffered  each 
year  by  the  building,  and  that  the  building  would  be  kept  in  good  repair 
during  its  life. 

Cohen  v.  Lowe,  Collector,  p.  147. 


545  U.  S.  TAX  CASES  795 

Deductions   for    depreciation   must    be   reasonable   within   meaning   of 

United  States  v.  Nashville  C.  &  St.  L.  Ey.,  p.  553. 
Court  passed  on  question  of  adequacy  of  depreciation  and  found  that 
Commissioner  had  not  allowed  adequate  depreciation. 

Camp  Bird,  Ltd.  v.  Howbert,  Collector,  p.  123. 

Where  delicate  machinery  designed  for  manufacture  of  a  certain  prod- 
uct is  used  in  manufacturing  a  product  of  much  coarser  materials  for  which 
use  it  is  not  fitted,  and  is  operated  at   a  heavy  overload  of  its   normal 
capacity,  extraordinary  depreciation  may  be  deducted. 
A.  E.  E.  45,  p.  628. 

Three  per  cent  is  a  reasonable  allowance  for  depreciation  of  bulk  freight 
steamships  on  the  Great  Lakes. 
A.  E.  E.  27,  p.  625. 

The  proper  rate  of  depreciation   on   steam  schooners   engaged  in  the 
coastwise  lumber  trade  is  5  per  cent. 
A.  E.  E.  279,  p.  655. 

Where  a  taxpayer  did  not  elect  during  the  life  of  patents  to  take  a 
deduction  for  their  depreciation,  he  is  not  entitled  to  such  a  deduction  in  a 
year  after  the  patents  have  expired. 
A.  E.  M.  95,  p.  696. 

(10)    Depletion  of  Natural  Eesources 

Under  the  Act  of  August  5,  1909,  no  deduction  was  authorized  for  the 
exhaustion  of  ore  bodies. 

Goldfield  Consolidated  Mines  Co.  v.  Scott,  Collector,  p.  231. 

Stratton's  Independence  v.  Howbert,  p.  493. 

Von  Baumbach,  Collector  v.  Sargent  Land  Co.,  p.  590. 

Owner  of  mining  leases  acquired  before  March  1,  1913,  held  entitled  to 
a  depletion  allowance,  based  on  value  of  interest  on  March  1,  1913,  where 
mines  had  been  thoroughly  developed  at  that  time;  and  method  of  deter- 
mining such  value  explained. 

Alworth-Stephens  Co.  v.  Lynch,  p.  835. 

Lessee  of  mine  held  not  entitled  to  deduction  from  gross  income  of 
value  of  ore  mined,  representing  its  value  in  place  when  the  law  took 
effect,  since  the  lease  confers  only  the  privilege  of  taking  the  ore,  and  does 
not  convey  the  legal  title  to  the  ore  in  place. 

United  States  v.  Biwabik  Mining  Co.,  p.  526. 

The  statutory  deduction  for  depletion  cannot  be  twice  credited,  once 
to  the  fee  owner  and  once  to  the  lessee,  the  exemption  belonging  by  right 
to  the  fee  owner. 

Weiss,  Collector,  v.  Mohawk  Mining  Co.,  p.  598. 

A  taxpayer  is  not  barred  from  claiming  depletion  by  reason  of  having 
carried  on  its  books  a  certain  sum  of  money  as  surplus  which  should  have 
been  carried  as  a  depletion  reserve. 

Forty  Fort  Coal  Co.  v.  Kirkendall,  Collector,  p.  223. 

A  lessor  of  mining  property  who  receives,  in  a  given  year,  royalties  that 
accrued  over  several   years,  and  who   reports   income   on  a  receipt   basis, 
may  deduct  from  the  royalties  received  such  part  of  the  depletion  allow- 
ance as  appertains  to  those  royalties. 
A.  E.  M.  17,  p.  678. 


796  545  U.  S.  TAX  CASES 

(11)    Contributions  to  Charities 
Donations  by  a  corporation  are  not  deductible  even  though  the  corpora- 
tion is  a  "close"  or  "family"  one. 
A.  R.  R.  373,  p.  665. 

IV.    Returns  and  Payment  of  Tax 
(1)    Necessity  for  Filing  Returns. 
Every  corporation  organized  for  profit  must  file  a  return  even  though 
having  income  insufficient  to  create  a  tax  liability. 

United  States  v.  Acorn  Roofing  Co.,  p.  518. 
United  States  v.  Military  Const.  Co.,  p.  553. 
Fontenot,   Collector,   ads.   Accardo,  p.   222;    same   case   above, 
p.  895. 

While  the  fact  that  a  taxpayer  sought  and  obtained  legal  advice,  in 
and  of  itself,  might  not  be  sufficient  to  excuse  its  failure  to  file  a  return, 
nevertheless  it  tends  to  show  that  the  taxpayer  was  acting  in  good  faith, 
and  in  the  absence  of  circumstances  casting  doubt  upon  its  good  faith,  its 
ignorance  of  its  liability  to  pay  a  tax  is  sufficient  to  constitute  a  reasonable 
cause  for  failure  to  make  and  file  a  return  within  the  prescribed  time. 

Dayton  Bronze  Bearing  Co.  v.  Gilligan,  Collector,  p.  875. 
Where  a  new  corporation  comes  into  existence  which  takes  over  the 
property  of  an  old  corporation,  both  the  old  and  the  new  will  be  required 
to  file  separate  returns  covering  the  periods  of  the  year  during  which  they 
were  in  active  control  of  the  business. 

A.  R.  R.  285,  p.  656. 

The  dissolution  of  a  corporation  before  the  return  is  due  does  not 
relieve  it  of  tax  liability  which  was  incurred  before  dissolution. 

United  States  v.  General  Inspection  &  Loading  Co.,  p.  540. 
Overland  Sioux  City  Co.,  Inc.,  v.  Clemens,  p.  387. 

(2)    Returns  Negligently  Understated 
An  understatement  on  a  return  which  is  due  to  an  honest  misunder- 
standing of  facts  or  law,  of  which  an  average  reasonable  man  might  be 
capable,  is  not  due  to  negligence  if  a  full  disclosure  is  made  in  the  return, 
and  penalty  should  not  be  asserted. 
A.  R.  R.  360,  p.  664. 
Penalties  for  negligence  in  incorrectly  reporting  invested  capital  should 
not  attach  in  any  case  where  the  return  makes  full  disclosure  of  the  amount 
of  appreciation   included   or   other   items   upon   which   the    computation   is 
otherwise  not  in  accordance  with  the  regulations,  permitting  the  Depart- 
ment to  make  assessment  of  additional  taxes  if  it  desires  to  do  so. 
A.  R.  M.  105,  p.  699. 

An  error  in  an  item  upon  which  the  return  contained  no  special  in- 
structions and  as  to  which  many  lawyers  and  accountants  differed,  the 
Bureau  of  Internal  Revenue  not  having  settled  its  practice  at  the  time  of 
filing  the  return,  would  be  an  error  due  to  an  honest  misunderstanding  of 
the  facts  or  law  of  which  an  average  reasonable  man  might  be  capable  and 
penalty  for  negligence  should  not  be  asserted. 
A.  R.  R.  360,  p.  664. 

Where  the  amortization  tentatively  claimed  is  in  excess  of  that  allowed 
by  the  regulations,  the  5%  penalty  and  interest  at  1%  per  month  should 
attach  only  on  additional  tax  due  by  reason  of  the  amount  disallowed  as  ex- 
cessive upon  final  settlement. 

A.  R.  M.  24,  p.  680. 


545  U.  S.  TAX  CASES  797 

Where  a  taxpayer  submits  a  return  ignoring,  or  in  conflict  with,  specific 
provisions  of  the  law  and  regulations,  he  is  presumed  to  have  been  negligent 
even  though  he  is  able  to  show  that  in  doing  so  he  relied  upon  some  other 
person  (not  connected  with  the  internal  revenue  service)  who  prepared 
the  return  or  advised  as  to  its  preparation.  This  presumption  may  be  re- 
butted in  extraordinary  cases. 
A.  E.  M.  23,  p.  679. 

In  questions  involving  judgment,   such   as  the  amount   deductible  for 
depreciation  or   salaries  and   the   like,  the   taxpayer  may   differ  with  the 
Bureau  and  yet  not  be  chargeable  with  negligence. 
A.  E.  M.  23,  p.  679. 

(3)    Prosecution  for  Fraudulent  and  False  Return 

The  offense  of  unlawfully  attempting  to  evade  the  tax  consists  of  two 
elements — false  return  with  intent.     Perjury  is  not  involved. 
Levy  V.  United  States,  p.  308. 

A  false  amended  return  may  be  the  basis  for  criminal  prosecution. 
Levy  V.  United  States,  p.  308. 

Evidence  held  sufficient  to  sustain  a  conviction  for  unlawfully  attempt- 
ing to  evade  the  tax,  but  insufficient  for  perjury. 
Levy  V.  United  States,  p.  308. 

If  one  acts  fairly  and  honestly  in  determining  what  debts  are  "ascer- 
tained to  be  worthless,"  he  is  not  guilty  of  filing  an  untrue  return. 
United  States  v.  Trost,  p.  539. 

Failure  to  keep  books  as  provided  by  statute  is  not  an  implication  of 
bad  faith  or  intent  to  defraud  the  government. 
Hubbard  v.  Brainard,  p.  266. 

(4)    Prosecution  for  Perjury  in  Eeturns 

In  a  prosecution  for  perjury,  proof  both  that  an  oath  was  administered 
and  that  the  officer  was  authorized  to  administer  it  is  essential  to  conviction. 
Levy  v.  United  States,  p.  308. 

The  administration  of  an  oath  by  one  of  the  persons  authorized  by 
local  law  to  take  oaths  in  their  several  districts,  as  the  Commissioner  of 
Deeds  in  New  York,  is  sufficient  to  sustain  a  conviction  for  perjury. 
United  States  v.  Benowitz,  p.  525. 
To  convict  for  perjury  it  must  be  shown  that  the  oath  was  false  and 
that  the  accused  knew  that  it  was  not  true,  or  that  he  took  it  rashly  with- 
out knowing  whether  it  was  true  or  not. 

United  States  v.  Mayer,  p.  549. 
Contradictions  in  two  affidavits  do  not  amount  to  perjury.     Evidence 
held  insufficient  to  sustain  a  conviction  for  perjury. 
Levy  V.  United  Sates,  p.  308. 

(5)    Administration  and  Procedure 

See  this  synopsis  under  this  general  heading,  applicable  to  all  internal 
revenue  taxes. 

The  last  day  of  the  taxable  year  is  the  * '  assessment  day ' '  of  the  in- 
come tax,  fixed  by  the  Act  of  October  3,  1913. 
Kimball  v.  Cotting  et  al.,  p.  285. 


798  545  U.  S.  TAX  CASES 

(6)  Payment  of  Tax 
A  payment  of  taxes  to  a  deputy  collector  other  than  the  deputy  assigned 
to  the  portion  of  the  district  within  which  the  taxes  are  levied  or  assessed 
is  unauthorized  by  law,  and  a  taxpayer  making  payment  to  such  deputy 
must  stand  a  loss  where  there  is  no  proof  that  the  same  was  ever  received 
by  the  collector. 

Hurst  V.  Lederer,  Collector,  p.  910. 

(7)     Payment  at  Source 
(a)     Non-resident  Aliens 
A  non-resident  alien  may  be  taxed  at  the  source  on  income  received 
from  within  the  United  States. 

United  States  v.  Erie  Eailroad  Company,  p.  537. 

(b)    Tax  Free  Bonds 
A  clause  in  a  bond  held  not  to  require  the  debtor  to  pay  income  tax, 
as  same  is  imposed  not  against  the  bond  or  interest,  but  against  the  income 
of  the  holder. 

Urquhart  v.  Marion  Hotel  Co.,  p.  583. 
A  debtor  may  not  deduct  from  the  interest  an  alleged  tax  where  it  ap- 
pears that  the  tax  was  not  properly  imposed  upon  the  interest  in  question. 
Northern  Central  Ey.  Co.  v.  Jackson,  p.  375. 
An  agreement  by  a  railroad  company  to  pay  all  expenses  incidental 
to  the  issue  of  certain  bonds  cannot  be  extended  to  cover  an  excise  tax 
on  the  interest  paid  on  such  bonds,  levied  under  an  act  passed  subsequently 
to  the  making  of  the  agreement. 

Baltimore  v.  Baltimore  Bailroad,  p.  84. 
A  tax-free  provision  in  a  mortgage  was  held  not  to  prevent  the  mort- 
gagor from  deducting  income  tax  from  interest  on  bonds. 
Haight  V.  Bailroad  Company,  p.  245. 

(c)    Tax-Free  Kent 
For  cases  dealing  with  the  liability  of  lessee  for  income  taxes  under 
the  terms  of  a  lease,  see 

Kimball  v.  Cotting  et  al.,  p.  285. 

Des  Moines  U.  By.  Co.  v.  Chicago  G.  W.  By.  Co.,  p.  179. 

Suter  V.  Jordan  Marsh  Co.,  p.  497. 

CAPITAL  STOCK  TAX 
(A)  Inactive  Corporations 
A  corporation  which  merely  holds  title  to  property,  subject  to  a  long 
term  lease  or  otherwise  out  of  its  control,  and  which  merely  receives  the 
income  from  such  property  and  distributes  the  same  as  dividends,  or  does 
such  acts  as  may  be  necessary  to  maintain  its  corporate  franchise,  is  not 
"carrying  on  or  doing  business"  within  the  meaning  of  the  statute. 

Zonne  v.  Minneapolis  Syndicate,  p.  616. 

United  States  v.  Emery,  Bird,  Thayer  Bealty  Co.,  p.  536. 

Jasper  &  E.  By.  Co.  v.  Walker,  Collector,  p.  276. 

McCoach  v.  Continental  Passenger  By.  Co.,  p.  337. 

McCoach,  Collector,  v.  Minehill  &  S.  H.  E.  B.  Co.,  p.  339. 

Maxwell,  Collector,  v.  Abrast  Eealty  Co.,  p.  335. 

State  Line  &  S.  B.  Co.  v.  Davis,  p.  485. 

New  York  Central  &  H.  B.  E.  Co.  et  al.  v.  Gill,  Collector,  p.  362. 

New  York  Mail  &  Newspaper  Trans.  Co.  v.  Anderson,  p.  364. 

Public  Service  Ey.  Co.  v.  Herold,  Collector,  p.  415. 


545  U.  S.  TAX  CASES  799 

Anderson,  Collector,  v.  Morris  &  E.  E.  Co.,  et  al.,  p.  75. 

Old  Colony  E.  Co.  v.  Gill,  p.  381. 

Waterbury  Gas  Light  Co.  v.  Walsh,  Collector,  p.  595. 

West  End  St.  Ey.  Co.  v.  Malley,  Collector,  p.  600. 

Miller  v.  Snake  Eiver  Valley  E.  Co.,  p.  352. 

Wilkesbarre  &  W.  V.  Traction  Co.  v.  Davis,  Collector,  p.  603. 

Bryant  &  May,  Ltd.,  v.  Scott,  Collector,  p.  114. 

Lewellyn,  Collector,  v.  Pittsburgh,  B.  &  L.  E.  E.  Co.,  p.  309. 

Dayton  &  Western  Traction  Co.  v.  Gilligan,  Collector,  p.  169. 

Traction  Cos.  v.  Collectors  of  Internal  Eevenue,  p.  503. 

Cambria  Steel  Co.  v.  McCoach,  p.  121. 

A  holding  company  which  does  nothing  more  than  receive  and  distribute 
income  from  subsidiary  operating  companies  is  not  "carrying  on  or  doing 
business."     Butterick  Co.  v.  United  States,  p.  117. 

United  States  v.  Nipissing  Mines  Co.,  p.  557. 

(B)    Active  Corporations 
A  corporation  which  is  doing  that  for  which  it  was  organized  is  ' '  car- 
rying on  or  doing  business." 

Von  Baumbach  v.  Sargent  Land  Co.,  p.  590. 
Eio  Grande  Junction  Ey.  Co.  v.  United  States,  p.  431. 
Chemung  Iron  Co.  v.  Lynch,  p.  135. 
Boston  Terminal  Co.  v.  Gill,  Collector,  p.  100. 
Associated  Pipe  Line  Co.  v.  United  States,  p.  79. 
Com'l  Travelers  Life  &  Accident  Ass'n  v.  Eodway,  Collector, 
p.  152. 

Business  is  that  which  occupies  the  time,  attention  and  labor  of  men  for 
the  purpose  of  a  livlihood  or  profit. 

Flint  v.  Stone-Tracy  Co.,  p.  217. 

A  corporation,  organized  to  purchase  land  and  construct  thereon  a  hotel 
and  to  operate,  manage  or  lease,  mortgage  or  sell  the  same,  which  secured 
the  land,  built  a  hotel  and  leased  the  same  to  another  corporation,  the  lessee 
paying  a  rent  determined  by  the  amount  of  the  profits,  held  to  be  carrying 
on  business. 

Detroit  Hotel  Co.  v.  Brady,  Collector,  p.  878. 

Corporations  organized  for  the  purpose  of  doing  business  and  engaging 
in  such  activities  as  leasing  property  and  collecting  rents  are  engaged  in 
business.        Flint  v.  Stone-Tracy  Co.,  p.  217. 

(C)  Determination  of  Tax 

It  is,  for  purposes  of  the  capital  stock  tax,  immaterial  whether  the  stock 
of  a  corporation,  of  an  association,  or  a  joint-stock  company  has  or  has  not 
par  value,  and  an  association  can  not  escape  taxation  by  adopting  the  mod- 
ern theory  of  no  par  value  for  its  stock. 

Malley,  formerly  Collector,  v.  Howard,  et  al..  Trustees,  p.  928. 

In  determining  the  fair  value  of  the  capital  stock  of  a  concern,  the 
Government  is  not  restricted  to  the  value  shown  upon  the  books,  but  may 
determine  the  value  of  the  business  and  property  as  a  going  concern,  and 
in  so  doing  has  the  right  to  look  to  the  net  worth  of  the  assets,  including 
its  surplus  and  undivided  profits,  as  shown  by  its  books,  and  also  to  the 
franchises,  good  will,  outstanding  contracts,  earning  capacity,  and  market 
value  of  its  stock. 

Central  Union  Trust  Co.  v.  Edwards,  Collector,  p.  860. 


800  545  U.  S.  TAX  CASES 

ESTATE  AND  INHERITANCE  TAXES 
(A)    Constitutionality  and  Nature 

The  constitutionality  of  Federal  estate  and  succession  taxes  was  upheld 
in  the  cases  below,  over  the  following  objections:     (a)  a  direct  tax  not  ap- 
portioned,  (b)   an  interference  with  the  exclusive  rights  of  the  states  to 
regulate  descent  and  distribution,  and  (e)  lack  of  uniformity. 
Knowlton  v.  Moore,  p.  289, 
McElligott,  Acting  Collector,  v.  Kissam  et  al.,  p.  340;  same  case, 

p.  915. 
New  York  Trust  Co.  v.  Eisner,  p.  370. 
Shwab  V.  Doyle,  p.  451;  affirmed,  p.  975. 

A  state  statute  providing  for  a  tax  of  2%  of  its  appraised  value  for 

five  years  preceding  the  date  of  death  of  a  decedent  upon  property  of  his 

estate  which  escaped  a  town  or  city  or  state  tax  during  the  year  preceding 

his  death  is  not  a  succession  tax,  but  a  penalty,  and,  as  such,  is  constitutional. 

Bankers'  Trust  Co.  v.  State,  p.  849. 

The  right  to  dispose  of  one's  property  by  will  and  the  right  to  have  it 
disposed  of  by  the  law  after  decease  is  created  by  statute,  and  therefore 
the  state  may  impose  such  conditions  upon  the  exercise  of  this  right  as  it 
may  determine. 

Bankers'  Trust  Co.  v.  State,  p.  849. 

A  state  may  constitutionally  tax  a  bequest  to  the  United  States,  since 
the  legacy  becomes  the  property  of  the  United  States  only  after  it  has  suf- 
fered a  diminution  to  the  amount  of  the  tax. 

Plummer  v.  Coler,  p.  963. 

Snyder  v.  Bettman,  p.  983. 

Likewise,  the  federal  government  may  tax  a  bequest  to  a  state. 

Snyder  v.  Bettman,  p.  983. 

United  States  v.  Perkins,  p.  993. 
A  state  may  constitutionally  impose  an  inheritance  tax  upon  a  legacy 
consisting  of  United  States  bonds. 

Plummer  v.  Coler,  p.  963. 

Likewise,  the  federal  government  may  constitutionally  require  that 
state  securities  be  included  in  the  estate  subject  to  tax. 

Greiner,  Executrix,  v.  Lewellyn,  Collector,  p.  902. 

A  state  legislature  can  not  constitutionally  place  a  transfer  tax  upon 
the  surviving  tenant  by  the  entirety  in  the  same  manner  as  though  the 
whole  property  belonged  to  the  deceased  tenant  in  a  case  where,  although 
the  deceased  tenant  died  after  the  passage  of  the  taxing  act,  the  estate  by 
the  entirety  was  created  before  its  passage. 
In  re  Lyon's  Estate,  p.  927. 
The  Federal  estate  tax  is  not  a  tax  on  the  property  of  the  decedent, 
but  upon  its  transfer  or  transmission  by  will  or  descent  from  the  decedent. 
Eandolph  v.  Craig,  Collector,  p.  420. 
The  Federal  inheritance  tax  is  an  excise  tax,  levied  on  the  estate  trans- 
mitted from  the  living  to  the  dead  and  so  the  court  is  not  concerned  with 
the  proper  division  of  the  tax  as  between  the  heirs  and  the  widow. 
Liebman  v.  Fontenot,  Collector,  p,  921. 

The  Federal  estate  tax  is  a  charge  against  the  estate  of  the  decedent 
and  80  is  not  apportionable  to  the  legacies  in  the  final  account  of  the 
executors.      j^  ^^  Hamlin,  p.  248. 

In  re  Lord's  Estate,  p.  315. 


545  U.  S.  TAX  CASES  801 

The  Federal  estate  tax  is  a  charge  against  every  portion  of  the  estate, 
and  upon  distribution,  realty,  as  well  as  personalty,  should  bear  its  propor- 
tionate part  of  the  tax. 

Hampton  v.  Hampton,  p.  249. 

(B)    Gross  Estate 

A  revocable  trust  is  not  such  a  transfer  as  will  exempt  the  property 
thereby  conveyed  from  payment  of  an  inheritance  tax  upon  the  death  of 
the  creator  of  the  trust. 

BuUen  v.  Wisconsin,  p.  116. 

In  view  of  the  rights  reserved  to  the  donor  in  a  certain  trust  instrument, 
some  of  which  were  tantamount  to  a  power  of  revocation,  so  far  as  the 
beneficiaries  were  concerned,  others  of  which  enabled  the  donor  to  keep  a 
firm  hold  on  the  management,  control  and  disposition  of  the  trust  estate 
during  his  life,  held  that  the  trust  was  one  intended  to  take  effect  in  pos- 
session or  enjoyment  at  or  after  the  death  of  the  donor. 
Congdon  v.  Lynch,  p.  865. 

For  cases  dealing  with  what  is  a  transfer  in  contemplation  of  or  in- 
tended to  take  effect  in  possession  or  enjoyment  at  or  after  death,  see 
Ebersole  v.  McGrath,  Collector,  p.  190. 
Gaither  v.  Miles,  Collector,  p.  227. 
In  re  Kueter's  Estate,  p.  916. 
In  re  Pauson's  Estate,  p.  953. 
People  V.  Tavener,  p.  959. 
Polk  V.  Miles,  Collector,  p.  407. 
Shwab  V.  Doyle,  pp.  451  and  975. 
Vaughan,  et  al..  Executors,  v.  Eiordan,  Collector,  p.  1002. 

The  provision  in  the  Eevenue  Act  of  1916  taxing  transfers  made  in 
contemplation  of  death  is  not  retrospective  in  its  operation  and,  hence,  a 
transfer  made  prior  to  the  passage  of  the  Act  is  not  subject  to  tax  where 
the  transferor  died  after  the  Act  took  effect. 

Shwab  V.  Doyle,  Collector,  p.  975;  reversing  case  below,  p.  451. 
Union  Trust  Company  v.  Wardell,  p.  990;  reversing  case  below, 

p.  517. 
Levy  V.  Wardell,  Collector,  p.  921. 
Knox  V.  McEUigott,   Collector,  p.  915;   reversing  case  below, 

p.  340. 
Curley,  et  al.,  v.  Tait,  Collector,  p.  871. 
Contra  but  overruled: 

Clark,  et  al..  Executors,  v.  Blalock,  Collector,  p.  861. 
Congdon  v.  Lynch,  p.  865. 

NOTE:  The  1918  and  1921  Acts  are  made  retrospective  in  operation 
by  express  wording  to  that  effect. 

Where  a  decedent,  several  years  before  his  death,  made  a  transfer  of 
securities,  reserving  a  certain  contingent  beneficial  interest  in  himself,  it 
was  held  that,  the  tax  could  not  be  levied  upon  the  full  value  of  the  secur- 
ities, but  only  upon  the  value  of  the  interest  which  he  retained  for  himself. 
Curley,  et  al.,  v.  Tait,  Collector,  p.  871. 

One-half  only  of  the  funds  in  a  joint  bank  account  of  decedent  and  hia 
wife  held  to  be  properly  included  in  the  gross  estate. 
Congdon  v.  Lynch,  p.  865. 


802  545  U.  S.  TAX  CASES 

Whether  any  part  of  community  property  should  be  included  in  the 
gross  estate  of  a  deceased  spouse  under  Federal  estate  tax  acts  depends 
upon  local  state  laws. 

Blum  V.  Warden,  Collector,  pp.  1004  and  97. 

In  computing  the  value  of  the  community  property  passing  to  the  heirs 
of  a  decedent,  no  deduction  should  be  made  for  the  value  of  the  life  usufruct 
in  favor  of  his  wife,  with  which  it  is  encumbered,  in  calculating  the  Federal 
estate  tax  under  the  Eevenue  Act  of  1916. 

Liebman  v.  Fontenot,  Collector,  p.  921. 

Under  the  Eevenue  Act  of  1916  whether  a  widow's  rights  of  home- 
stead, dower,  and  a  year's  support  must  be  included  in  the  gross  estate  of 
her  deceased  husband  in  the  assessment  of  the  Federal  Estate  Tax  depends 
upon  whether  under  local  state  law  such  rights  are  vested  in  her  by  opera- 
tion of  law  independently  of  her  husband  or  are  transmitted  to  her  through 

^^^'  Randolph  v,  Craig,  Collector,  p.  420. 

Title  Guarantee  &  Trust  Co.  v.  Edwards,  Collector,  p.  988. 

NOTE. — The  Eevenue  Acts  of  1918  and  1921  provide  for  inclusion  in 
gross  estate  of  any  interest  of  a  surviving  spouse,  existing  at  time  of  dece- 
dent's death  as  dower,  curtesy,  or  by  virtue  of  a  statute  creating  an  estate 
in  lieu  of  dower  or  curtesy. 

Under  the  Eevenue  Act  of  1916  the  gross  estate  of  a  decedent  does  not 
include  property  passing  under  testamentary  execution  of  a  general  power 
of  appointment. 

Ebersole  v.  McGrath,  Collector,  p.  190. 
United  States  v.  Field,  p.  538. 

NOTE. — The  Eevenue  Acts  of  1918  and  1921  expressly  include  such 
property  in  the  gross  estate. 

For  cases  distinguishing  contingent  and  vested  interests,  see 

Henry  v.  United  States,  p.  256. 

Simpson  v.  United  States,  p.  452. 

Lynch  v.  Union  Trust  Co.,  p.  323.  •> 

Kahn,  et  al..  Executors  v.  United  States,  p.  912. 

Where  a  widow  was  left  an  annuity  of  $25,000  and  a  power  of  appoint- 
ment at  her  death  over  $250,000,  an  estate  tax  computed  upon  the  sum  of 
$250,000  plus  the  value  of  an  annuity  of  $25,000  per  year,  was  excessive;  the 
tax  should  have  been  computed  upon  the  sum  of  $250,000,  plus  the  value  of 
an  annuity  of  $15,000  per  year,  inasmuch  as  the  $250,000,  over  which  the 
widow  had  the  power  of  testamentary  appointment,  would  produce  an  income 
of  $10,000  per  annum,  and  so  $15,000  only  would  have  to  be  supplied  by 
other  portions  of  the  estate. 

Dugan  et  al.,  v.  Miles,  Collector,  p.  880. 

In  the  assessment  of  an  inheritance  tax  the  use  of  mortuary  tables  for 
determining  the  present  value  of  future  contingent  interests  is  proper. 
Simpson  et  al.  v.  United  States,  p.  452. 

In  assessment  of  inheritance  tax  upon  a  life  estate,  the  actual  duration 
of  the  tenant's  life,  and  not  the  fictitious  duration  derived  from  mortuary 
tables,  should  be  used,  where  the  tenant  died  before  the  assessment. 
Herold,  Collector,  v.  Kahn  et  al.,  p.  257. 


545  U.  S.  TAX  CASES  803 

(C)    Deductions 

Under  Federal  estate  tax  acts  no  deduction  is  allowed  from  gross  estate 
for  the  amount  of  the  federal  estate  tax,  but  the  estate  passing  is  treated 
without  regard  to  the  incidence  of  the  tax  itself. 
Slocum  V.  Edwards,  Collector,  p.  977. 

Under  the  Revenue  Act  of  1916  a  state  inheritance  tax  on  the  rights  of 
individual  beneficiaries  is  not  deductible  from  the  gross  estate  in  computing 
the  Federal  estate  tax. 

New  York  Trust  Co.  v.  Eisner,  p.  370. 

Title  Guarantee  &  Trust  Co.  v.  Edwards,  Collector,  p.  988. 

Contra  but  overruled:     Sayre  et  al.  v.  Brewster,  Collector,  p.  444. 

If,  however,  the  state  tax  is  an  estate  and  not  a  legacy  tax,  it  is  de- 
ductible. 

Northern  Trust  Co.  v.  Lederer,  Collector,  p.  376. 
Curley  et  al.  v.  Tait,  Collector,  p.  873. 

NOTE. — Under  the  Eevenue  Acts  of  1918  and  1921  no  estate,  succes- 
sion, legacy,  or  inheritance  tax  is  deductible. 

The  Federal  estate  tax  is  a  proper  deduction  from  the  value  of  the  estate 
in  computing  a  state  inheritance  tax. 

People  of  State  of  Illinois  v.  Northern  Trust  Co.,  p.  401. 

Bugbee,  Comptroller,  v.  Eoebling,  et  al.,  p.  853. 

In  re  Inman's  Estate,  p.  911. 

Contra:     In  re  Bierstadt's  Estate,  p.  90. 

Succession  of  Gheens,  p.  986. 

In  computing  the  Federal  estate  tax  the  amount  of  the  residuary  estate 
passing  to  charity  should  be  reduced  by  the  state  legacy  tax  payable  out  of 
such  residuary,  but  not  by  the  Federal  estate  tax. 
Slocum  V.  Edwards,  Collector,  p.  977. 

Amounts  expended  by  executors  for  repairs  and  upkeep  of  buildings 
belonging  to  an  estate  and  for  fire  insurance,  the  same  having  been  allowed 
in  the  final  account  of  the  executors  in  the  probate  court,  are  proper  deduc- 
tions from  the  gross  estate  under  the  Act  of  1916. 
Congdon  v.  Lynch,  p.  865. 

Under  the  Eevenue  Act  of  1916  a  widow's  dower,  homestead  and  year's 
support,  if  included  within  decedent 's  gross  estate,  are  deductible  as  charges 
against  the  estate. 

Eandolph  v.  Craig,  Collector,  p.  420. 

NOTE. — The  Eevenue  Acts  of  1918  and  1921  provide  for  deduction  of 
such  amounts  reasonably  required  and  actually  expended  for  the  support, 
during  the  settlement  of  the  estate,  of  those  dependent  upon  the  decedent  as 
are  allowed  by  the  laws  of  the  jurisdiction  under  which  the  estate  is  being 
administered. 

(D)  Payment  of  Tax 

Under  the  Third  Liberty  Bond  Act,  prescribing  that  bonds  bearing 
interest  at  a  higher  rate  than  4%  per  annum,  owned  by  any  person  continu- 
ously for  at  least  six  months  prior  to  his  death,  are  redeemable  for  estate 
taxes,  the  time  of  prior  holding  of  4%  bonds  may  not  be  added  to  the  time 
following  their  conversion  into  4^%  bonds  in  order  to  fulfill  the  statutory 
requirement  of  time. 

Smietanka,  Collector,  v.  Ullman,  p.  981. 


804  545  U.  S.  TAX  CASES 

STAMP  TAXES 
(A)    Form  and  Face  of  Instrument 
The  liability  of  an  instrument  to  a  stamp,  as  well  as  the  amount  of  the 
duty,  is  determined  by  the  form  and  face  of  the  instrument,  and  cannot  be 
affected  by  proof  of  facts  outside  the  instrument  itself. 
Granby  Mercantile  Co.  v.  Webster,  p.  238. 

In  settling  whether  an  instrument  should  be  stamped  or  not,  regard  is 
to  be  had  to  its  form,  rather  than  to  its  operation;  though  it  may  be  a  device 
to  avoid  the  revenue  acts,  and  though  its  operation  may  have  the  effect 
of  avoiding  them,  yet  if  the  device  be  carried  out  by  means  of  legal  forms, 
it  is  subject  to  no  legal  censure. 

United  States  v.  Isham,  p.  545. 

(B)    Persons  Responsible  for  the  Payment  of  the  Tax 
Grantee  in  a  deed  is  required  to  afl&x  stamps  upon  failure  of  grantor 
to  do  so. 

Home  Title  Ins.  Co.  v.  Keith,  p.  263. 

The  drawer  of  a  bill  is  liable  for  the  stamp  and  so  also  is  any  party 
for  whose  use  or  benefit  the  order  is  made,  signed,  or  issued. 
Granby  Mercantile  Co.  v.  Webster,  p.  238. 

(C)    Effect  of  Failure  to  Affix  or  Cancel  Stamps 

A  Federal  Act  providing  that  no  instruments  not  duly  stamped  shall  be 
admitted  in  evidence  in  any  court  will  be  construed  to  apply  only  to  pro- 
ceedings in  federal  courts  and  will  not  be  extended  to  state  courts. 

Duffy  V.  Hobson,  p.  187. 

Knox  V.  Eossi,  p.  292. 

Contra:     Chartiers  &  E.  T.  Co.  v.  McNamara,  p.  133. 

Davis  V.  Evans,  p.  167. 

Congress  is  without  constitutional  authority  to  control  the  proceedings 
of  state  courts,  and,  therefore,  cannot  control  the  admissibility  in  evidence 
in  state  courts  of  unstamped  instruments. 

Duffy  V.  Hobson,  p.  187. 

Craig  V.  Dimock,  p.  159. 

Unstamped  instruments  are  valid  and  admissible  in  evidence  even  in 
federal  courts  when  the  act  providing  for  the  tax  does  not  contain  words 
making  such  instruments  invalid  or  inadmissible. 
Cole  V.  Ealph,  p.  148. 

But  see.  United  States  v.  Masters,  p.  548,  decided  under  Eevenue  Act 
of  1918,  on  ground  that  that  act  by  reference  incorporates  provisions  of 
unrepealed  Act  of  1898  with  respect  to  validity  and  effect  of  unstamped 
instruments. 

A  note  which  lacks  the  stamping  required  by  law  is  not  "complete 
and  regular  on  its  face"  and  hence  a  purchaser  of  the  same  is  not  a  holder 
in  due  course. 

Lutton  V.  Baker,  p.  323. 

A  referee  in  bankruptcy  may  refuse  to  accept  an  unstamped  general 
letter  of  attorney  and  may  refuse  to  certify  an  order  unless  a  stamp  is 
af&xed  thereto. 

In  re  Hawley,  p.  252. 

Intent  to  defraud  the  government  will  not  be  presumed  from  the  mere 
fact  of  omission  to  properly  stamp  an  instrument. 
Dowell  v.  Applegate  et  al.,  p.  186. 


545  U.  S.  TAX  CASES  805 

It  is  immaterial  who  aflixes  the  stamps,  so  long  as  they  are  aflSxed. 

Dale  ads.  Adams,  p.  165. 
Failure  to  write  the  initials  of  the  person  cancelling  the  stamp  does 
not  affect  the  admissibility  of  the  instrument. 

Poster  V.  Holley  's  Administrators,  p.  224. 
Failure  to  cancel  the  stamp  does  not  render  the  instrument  void. 

Dale  ads.  Adams,  p.  165. 

(D)    Instruments  and  Transactions  Taxable 
(1)    Bonds  and  Certificates  of  Indebtedness 

Bonds  taken  by  a  city  in  the  exercise  of  a  strictly  governmental  junc- 
tion are  exempt  from  taxation. 

Ambrosini  v.  United  States,  p.  69. 
No  additional  tax  is  required  upon  the   issuance   of  a  permanent   or 
definite  bond  in  substitution  for  a  temporary  bond  which  has  been  delivered. 
Chile  Copper  Co.  v.  Edwards,  Collector,  p.  138. 
The  Eevenue  Act  of  1918  imposes  a  tax  not  only  on  bonds,  debentures, 
or  certificates  of  indebtedness,  but  also  upon  everything  known  generally 
as  corporate  certificates,  and  therefore,  so-called  *'car  trust  certificates"  are 
taxable  although  they  do  not  literally   come  within  the  specific  forms  of 
securities  named. 

Fidelity  Trust  Co.  v.  Lederer,  pp.  894  and  208. 

A  bond  filed  to  qualify  as  a  state  ofiicer  is  not  subject  to  Federal 
stamp  tax. 

Bettman,  Collector,  v.  Warwick,  p.  90. 

(2)    Stock  Issue  and  Transfer 

Certificates  of  interest  in  a  Massachusetts  trust  are  subject  to  tax 
under  an  act  imposing  a  tax  on  certificates  of  stock  issued  by  any  ' '  associa- 
tion, company,  or  corporation." 

Malley,  Collector,  v.  Bowditch  et  al.,  p.  327. 

The  exchange  of  original  certificates  of  one  kind  of  stock  for  original 
certificates  of  two  other  kinds  of  stock,  the  tax  on  all  of  which  had  been 
previously  paid,  does  not  involve  an  issue  of  "original"  stock  for  which 
the  corporation  must  pay  a  stamp  tax. 

Edwards,  Collector,  v.  Wabash  Ey.  Co.,  p.  193. 

A  resolution  of  a  board  of  directors  of  a  corporation  authorizing  the 
issuance  of  stock  of  another  corporation  direct  to  its  stockholders  in  ex- 
change for  a  transfer  of  its  assets  is  a  transfer  requiring  payment  of  a 
stamp  tax. 

Marconi  Wireless  Telegraph  Co.  v.  Duffy,  Collector,  p.  330. 

(3)    Sales  on  Exchange  or  Board  of  Trade 

Sales  on  exchange  or  board  of  trade,  for  future  delivery,  are  subject 
to  stamp  tax. 

Nicol  v.  Ames,  p.  371. 
Sales  at  stock  yards  are  subject  to  stamp  tax. 

Nicol  V.  Ames,  p.  371. 

A  "call"  issued  by  a  stock  broker  is  subject  to  tax  as  an  agreement 
to  sell. 

Treat  v.  White,  p.  509. 


806  545  U.  S.  TAX  CASES 

It  is  the  obligation  of  every  seller,  in  every  sale  of  goods  upon  an  ex- 
change for  future  delivery,  to  make  a  memorandum  of  the  sale. 
Nicol  v.  Ames,  p.  371. 

Each  sale  or  agreement  to  sell  any  grain  at  a  board  of  trade  is  taxable, 
though  during  the  day  several  separate  sales  are  made  of  the  same  lot  of 
grain  and  at  the  close  of  the  day  the  only  memorandum  made  shows  the 
transfer  from  the  original  seller  to  the  last  buyer. 

Calkins  v.  Smietanka,  Collector,  p.  119. 

So-called  "offers"  to  sell  grain  at  a  board  of  trade,  made  subject  to 
deferred  acceptance,  held  taxable  on  the  basis  of  the  total  price  for  which 
the  selle'r  agreed  to  sell  and  not  on  the  basis  of  what  the  broker  was  to 
receive  as  commission. 

Calkins  v.  Smietanka,  Collector,  p.  119. 

(4)    Conveyance  of  Realty 

It  is  not  unconstitutional  to  tax  masters'  and  referees'  deeds  under  a 
Federal  act. 

Home  Title  Ins.  Co.  v.  Keith,  p.  263. 

A  master's  deed  made  pursuant  to  order  of  court  is  subject  to  tax. 
Crawford  v.  New  South  Farm  &  Home  Co.,  p.  160. 
Farmers'  Loan  &  Trust  Co.  v.  Council  Bluffs  G.  &  E.  L.  Co., 
p.  206. 

MISCELLANEOUS  WAR  TAXES 

(A)     Transportation  and  Messages 

Demurrage  charges  for  failure  to  load  and  unload  cars  within  the  "free 
time"  allowed  by  rules  of  railroad  companies  should  be  included  as  part  of 
the  tax  of  transportation  and  thereby  subject  to  the  transportation  tax. 
The  Proctor  &  Gamble  Co.  v.  United  States,  p.  964. 

Telegraph  messages  transmitted  by  telegraph  company  for  a  railroad 
company  pursuant  to  a  contract  for  the  mutual  exchange  of  services  free  of 
charge  are  subject  to  the  tax  imposed  under  the  Act  of  1918. 

Western  Union  Telegraph  Company  v.  Delaware,  Lackawanna, 
etc..  Railroad  Company,  p.  1008. 

(B)     Sales  Tax 

Under  an  Act  levying  a  tax  on  goods  "sold  or  removed  for  sale,"  a 
removal  for  the  purpose  of  forwarding  a  sale  is  a  removal  for  sale  within 
the  meaning  of  the  act. 

United  States  v.  American  Chicle  Co.,  p.  523. 

An  Act  imposing  a  tax  on  the  sale  of  automobile  trucks  by  manufac- 
turers cannot  be  construed  to  permit  a  tax  to  be  imposed  on  the  sale  of 
parts  of  trucks  even  though  it  appears  that  such  trucks  are  never  sold  as 
units  by  manufacturers. 

Eeeh-Markaber  Co.  v.  Lederer,  Collector,  p.  424. 

Sweet  chocolate  sold  in  parcels  of  such  sizes  and  shapes  that  it  is  com- 
monly purchased  and  considered  as  candy  by  the  public  is  taxable  as  candy, 
but  sweet  chocolate  sold  in  large  purchases  not  as  candy  but  intended  for 
further  manufacturing  purposes  is  not  taxable  as  candy. 

Malley,  Collector,  v.  Walter  Baker  &  Co.,  p.  931. 


545  U.  S.  TAX  CASES  807 

The  ouija  board  is  a  "game"  within  the  meaning  of  the  Aet  of  1918. 
Baltimore  Talking  Board  Co.  v.  Miles,  Collector,  p.  845. 

The  place  of  payment  of  an  excise  tax  may  depend  on  the  place  of  sale. 
D©  Bary  et  al.  v.  Dunne,  p.  173. 

(C)  Occupations  Tax 

The  word  "broker"  in  the  Eevenue  Act  of  1918,  requiring  brokers  to 
pay  a  special  tax,  includes  tobacco  warehousemen  who  sell  tobacco  without 
bringing  the  buyer  and  seller  together. 

Cochran  &  Connally  v.  United  States,  p.  869. 

(D)  Child  Labor  Tax 

For  cases  dealing  with  validity  of  Child  Labor  Tax  Act,  approved  Feb- 
ruary 24,  1919,  see: 

The  Atherton  Mills  v.  Johnson,  p.  840. 

Bailey,  Collector  v.  The  Drexel  Furniture  Co.,  p.  841. 

Bailey,  Collector  v.  George,  p.  843. 

(E)     Munitions  Tax 

For  cases  dealing  with  the  question  of  what  constitutes  "manufaetur- 
jj^g     *     *     *     shells"  within  the  meaning  of  the  Act,  see 

Forged  Steel  Wheel  Co.  v.  Lewellyn,  Collector,  p.  223. 
Carbon  Steel  Co.  v.  Lewellyn,  Collector,  p.  125. 
Dayton  Brass  Castings  Co.  v.  Gilligan,  pp.  168  and  874. 

Ammunition    belts   for    machine    guns   are   included   within   the   words 
"parts"  or  "appendages"  of  machine  guns  used  in  the  statute. 
Mills  Woven  Cartridge  Belt  Company  v.  Malley,  p.  948. 

A  company  moulding  brass  ingots  into  small  castings  for  fuses  is  sub- 
ject to  the  War  Munitions  Tax  even  though  the  material  was  furnished  by 
another  company  for  whom  the  work  was  done,  the  delivery  of  the  castings 
being  a  "disposition"  of  the  same  within  the  meaning  of  the  Act. 
Dayton  Brass  Castings  Co.  v.  Gilligan,  Collector,  p.  874. 

Amounts  paid  by  a  corporation,  engaged  in  manufacturing  shells,  to 
an  individual  under  a  contract  by  which  the  latter  was  to  share  in  the 
profits  of  such  business,  are  not  expenses  of  manufacture  deductible  by  the 
corporation  from  the  gross  amount  received  from  sales,  in  ascertaining  tax- 
able net  profits. 

Traylor  Engineering  &  Mfg.  Co,  v.  Lederer,  Collector,  p.  507. 

The  payment  of  a  tax  by  the  subcontractor  on  his  profits  does  not  relieve 
the  main  contractor  from  a  tax  on  his  profits. 

Carbon  Steel  Co.  v.  Lewellyn,  Collector,  p.  125. 

ADMINISTRATION  AND  PEOCEDUKE 

(A)    Collection  of  Taxes 
(1)    Assessment 
The  Commissioner  need  not  require  a  return.    He  may  make  an  assess- 
ment upon  information  derived  from  any  source. 

Anderson  v.  Farmers'  Loan  &  Trust  Co.,  p.  72. 
The   Commissioner  may  make   an   additional   assessment   under   a   statute 
permitting    such    procedure    where    a    * '  false ' '    return    has    been    filed,    even 
though  the  return  was  not  fraudulent,  but  merely  incorrect. 
Elliott  Nat'l  Bank  v.  GiU,  p.  199. 


808  545  U.  S.  TAX  CASES 

Taxes  past  due  are  a  debt,  without  assessment. 
King  V.  United  States,  p.  286. 

While  a  tax  is  not,  before  determination,  a  debt  in  the  strict  sense  of  the 
term,  it  is  in  the  broader  meaning  of  the  word. 

United  States  v.  General  Inspection  &  Loading  Co.,  p.  540. 
Interest  prescribed  by  statute  at  1%  per  month  is  a  debt. 

United  States  v.  Guest,  p.  543. 
Penalties  cannot  be  assessed  by  a  collector  without  giving  the  person 
charged  his  day  in  court. 

Middleton  v.  Mee,  Collector,  p.  940. 

(2)    Siunmary  Proceedixigs 

Sale  of  property  by  distraint  for  collection  of  a  penalty  assessed  with- 
out a  hearing  is  not  due  process. 

Kausch  V.  Moore,  Collector,  p.  280. 

Penalties  and  forfeitures  are  collectible  by  suit  and  not  by  distraint 
proceedings. 

Fontenot,  Collector,  v.  Accardo,  p.  895;  same  case  below,  p.  222. 
Ledbetter  v,  Bailey,  Collector,  p.  919. 
Sale  of  real  or  personal  property  on  distraint  before  suit  for  taxes  does 
not  deprive  owner  of  property  without  due  process. 
Springer  v.  United  States,  p.  458. 
A  collector  is  not  guilty  of  trespass  when  he  acts  upon  a  writ,  process, 
or  warrant,  fair  on  its  face, 

Glasgow  V.  Eowse,  p.  230. 
Provisions  to  compel,  in  suits  other  than  criminal,  the  production  of 
books,  papers,  etc.,  to  prove  any  allegations  made  by  the  United  States, 
are  unconstitutional  when  applied  to  a  suit  based  upon  an  alleged  fraud 
under  the  revenue  laws,  since  they  in  effect  compel  the  defendant  to  testify 
against  himself. 

Boyd  V.  United  States,  p.  104. 
If  any  person  refuses  to  make  a  return  he  may  be  interrogated  by  the 
collector. 

Fontenot  ads.  Accardo,  p.  222;  same  case  on  appeal,  p.  895. 
The  revenue  act  may  authorize  Internal  Eevenue  Agents  to  examine 
private  books  and  papers. 

Perry  v.  Newsome,  p.  402. 

(3)    Civn  Actions 
An  action  at  law  lies  for  the  collection  of  taxes  even  though  the  taxing 
statute  does  not  specifically  provide  such  remedy. 
United  States  v.  Chamberlain,  p.  529. 
United  States  v.  Tilden,  p.  576. 

United  States  v.  Nashville  C.  &  St.  L.  Ey.  Co.,  p.  553, 
The  filing  of  returns  and  the  payment  of  the  taxes  assessed  thereon  do 
not  prevent  suit  for  additional  taxes  for  the  period  covered  by  the  returns. 
United  States  v.  Tilden,  p.  576. 
Suit  lies  for  tax  under  Eevenue  Act  of  August  5,  1909,  without  assess- 
ment.   The  action  of  debt  lies  for  the  recovery  of  a  tax,  either  when  it  is  a 
sum  certain,  or  when  readily  reducible  to  certainty. 

United  States  v.  Grand  Eapids  &  S.  Ey.  Co.,  p.  541, 
United  States  v.  Minneapolis  Threshing  Machine  Co.,  p,  552, 
United  States  v.  Nashville,  C.  &  St,  L,  Ey.  Co.,  p.  553. 
United  States  v.  Waddell  Investment  Co.,  p.  1001. 


545  U.  S.  TAX  CASES  809 

Negligence  or  laches  of  government  oflScers  or  agents  constitutes  no 
bar  to  an  action  by  the  government. 

United  States  v.  Guest,  p.  543. 
A  suit  in  equity  is  proper  to  reach  assets  wrongfully  distributed  by  di- 
rectors of  a  corporation  to  themselves,  as  dividends,  to  evade  taxes. 
United  States  v.  Capital  City  Dairy  Co.,  p.  528. 
Persons  to  whom  corporate  assets  have  been  distributed  without  con- 
sideration, as  stockholders  in  case  of  dissolution,  are  liable  for  corporate 
tax  under  the  trust  fund  doctrine,  to  the  extent  of  the  distribution. 
United  States  v.  McHatton  et  al.,  p.  550. 
The  government  does  not  need  a  judgment  to  follow  assets  of  a  corpora- 
tion in  the  hands  of  stockholders,  in  case  of  fraudulent  evasion  of  taxes. 
United  States  v.  Capital  City  Dairy  Co.,  p.  528. 

A  judgment  rendered  under  a  penal  statute  in  favor  of  the  United 
States  cannot  be  enforced  against  the  heirs  of  the  criminal. 
United  States  v.  Theurer,  p.  575. 
Negligence   or  laches   of  government   officers   or  agents  in  permitting 
assets  seized  by  collector  to  be  abstracted  from  warehouse,  constitutes  no  bar 
to  government  action  on  bond. 

United  States  v.  Guest,  p.  543. 

(4)    Lien  for  Taxes 

The  claim  of  the  United  States  arising  out  of  income  taxes  and  penalties 
due  has  priority  over  claims  for  state  and  county  taxes. 

United  States  v.  San  Juan  County  et  al.,  p.  999. 
The  government  lien  for  taxes  is  superior  to  the  rights  of  subsequent 
encumbrancers  or  purchasers  without  knowledge. 
United  States  v.  Curry,  p.  534. 
United  States  v.  Turner  et  al.,  p.  577. 
But  see 

Mansfield  v.  Excelsior  Eefining  Co.,  p.  329. 
The  lien  of  the  government  for  taxes  attaches  on  all  property  after  the 
requirements  of  assessment  and  demand  have  been  complied  with. 
United  States  v.  Curry,  p.  534. 
United  States  v.  Pacific  Eai'lroad,  p.  560. 
Demand  implies  previous  ascertainment  of  the  sum  due,  and  this  ascer- 
tainment is  by  means  of  the  return  or  assessment. 

United  States  v.  Pacific  Eailroad,  p.  560. 
The  lien  of  the  federal  government  for  taxes  attaches,  notwithstanding 
failure  to  comply  with  a  state  recording  statute. 
United  States  v.  Snyder,  p.  574. 

Personal  property  need  not  be  sold  before  resorting  to  real  estate  for 
satisfaction  of  tax  liability. 

United  States  v.  Curry,  p.  534. 
A  sale  by  a  collector  on  lien  for  taxes  carries  only  the  taxpayer's  inter- 
est and  not  that  of  the  owner  in  fee  or  prior  lien  holder,  even  though  the 
government  holds  a  waiver  executed  by  such  third  persons,  expressly  stip- 
ulating that  the  lien  of  the  United  States  for  taxes  shall  have  priority  over 
their  interests  in  premises  occupied  by  taxpayer. 

Mansfield  v.  Excelsior  Eefining  Co.,  p.  329. 
The  remedies  of  distraint  and  action  in  equity  against  land  for  the 
collection  of  tax  are  cumulative. 

United  States  v.  Blaeklock,  p.  527. 


810  545  U.  S.  TAX  CASES 

(5)     Suits  to  Enjoin  Collection 

The  collection  of  an  internal  revenue  tax  cannot  be  enjoined  by  suit 
against  the  collector,  because  of  the  prohibition  of  Sec.  3224,  Kevised 
Statutes. 

Dodge  V.  Osbom,  p.  182. 

Kausch  V.  Moore,  p.  280. 

Ketterer,  v.  Lederer,  p.  283. 

Magee  v.  Denton  et  al.,  p.  325. 

Pullman's  Palace  Car  Co.  v,  Allen,  p.  418. 

Violette  v.  Walsh,  p.  589. 

Willmann  et  al.,  Trustees,  v.  Walsh,  p.  609. 
See  also 

Nye  Jenks  &  Co.  v.  Town  of  Washburn  et  al.,  p.  379. 

Nor  can  this  be  done  indirectly,  by  a  suit  of  a  stockholder  against  a 
corporation. 

Straus  V.  Abrast  Eealty  Co.,  p.  496. 
Nor  indirectly,  by  suit  to  have  sale  of  taxpayers*  property  by  collector 
declared  void. 

Gouge  V.  Hart,  Collector,  p.  236. 
But,  a  trustee  was  enjoined  from  voluntarily  complying  with  an  order 
of  the  Bureau  of  Internal  Eevenue  to  pay  additional  tax. 
Weeks  v.  Sibley,  p.  597. 
And,  upon  averment  of  unconstitutionality,  a  stockholder  may  enjoin 
the  corporation,  notwithstanding  the  prohibition  of  the  statute. 
Brushaber  v.  Union  Pacific  E.  E.  Co.,  p.  107. 

The  inhibition  of  Sec.  3224  E.  S.  applies  to  all  assessments  and  collec- 
tions of  internal  revenue  taxes  made  or  attempted  to  be  made  under  color 
of  oflSce  by  internal  revenue  officers  charged  with  general  jurisdiction  over 
the  assessment  and  collection  of  such  taxes,  and  if,  the  Commissioner,  in 
assessing  a  tax,  or  the  collector,  in  collecting  it,  acts  under  color  of  his 
office,  no  suit  to  restrain  the  assessment  or  collection  of  the  tax  can  be 
maintained. 

Nichols,  Collector,  v.  Gaston,  et  al..  Executors,  p.  949. 

Page,  Collector,  v.  Polk,  p.  951. 

A  collector,  proceeding  to  collect  by  distraint  an  assessment  of  Federal 
estate  tax,  before  the  expiration  of  the  time  for  payment  allowed  by  the 
statute,  is  acting  under  color  of  authority. 

Nichols,  Collector,  v.  Gaston,  et  al.,  Executors,  p.  949. 

Page,  Collector,  v.  Polk,  p.  951. 

Sec.  3224  E.  S.  does  not  prevent  an  injunction  in  a  case  apparently 
within  its  terms  in  which  some  extraordinary  and  entirely  exceptional  cir- 
cumstances make  its  provisions  inapplicable. 

Hill  v.  Wallace,  Secretary  of  Agriculture,  et  al.,  p.  905. 

Bailey,  Collector,  v.  George,  p.  843. 

But  the  averment  in  a  bill  that  a  taxing  statute  is  unconstitutional  is 
not  sufficient  to  take  the  case  out  of  the  prohibition  of  the  statute. 
Bailey,  Collector,  v.  George,  p.  843. 

An  injunction  will  be  granted  in  a  case  where  the  taxpayer,  if  forced 
to  pay  the  tax  by  distraint,  would  have  no  recourse  at  law  due  to  the  fact 
that  the  statutory  period  allowed  for  the  filing  of  a  claim  for  refund  ha8 
expired. 

Du  Pont  V.  Graham,  Collector,  p.  882. 


545  U.  S.  TAX  CASES  811 

If  it  clearly  appears  that  the  action  of  the  collector  is  a  nullity  or  that 
the  property  about  to  be  seized  is  not  liable  for  the  assessment,  an  injunc- 
tion lies  to  restrain  collection. 

Markle  v.  Kirkendall,  Collector,  p.  331. 

Eeeeivers  of  a  federal  court,  upon  their  own  application  for  instructions, 
were  ordered  not  to  pay  any  income  tax. 

Western  Pacific  E.  Co.  v.  Scott,  p.  602. 

However,  on  an  application  of  trustees  for  instructions,  a  state  court 
refused  to  assume  jurisdiction  of  federal  tax  questions  raised. 

In  re  Application  of  Willmann  et  al.,  Trustees,  p.  611. 

The  court  will  pass  upon  the  merits  of  a  supplemental  bill  to  recover 
the  tax  after  payment,  even  though  the  original  bill  was  brought  to  enjoin 
the  collection  of  the  tax,  where  it  is  clear  that  the  taxpayer  could  not  recover 
even  if  the  action  were  rightfully  brought. 
Dodge  V.  Brady,  p.  180. 

Sec.  3224,  E.  S.,  does  not  prevent  the  granting  of  an  injunction  to 
restrain  collection  of  a  penalty  by  distraint. 

Lipke  V.  Lederer,  Collector,  p.  924. 

Fontenot,  Collector,  v.  Accardo,  p.  895. 

Kelly  V.  Lewellyn,  Collector,  p.  914. 

Ledbetter  v.  Bailey,  Collector,  p.  919. 

Middleton  v.  Mee,  Collector,  p.  940. 

Thome  v.  Lynch,  Collector,  p.  98G. 

Contra:  Kohlhamraer  v.  Smietanka,  p.  293. 

Pummilli  v.  Eiordan,  Collector,  p.  966. 

Eegal  Drug  Corp.  v.  Wardell,  p.  426. 

Violette  v.  Walsh,  p.  589. 
But  all  lawful  taxes  due  must  first  be  paid  or  tendered. 

Kausch  V.  Moore,  Collector,  p.  280. 

Fontenot,  Collector,  v.  Accardo,  pp.  222  and  895. 

Kelly  V.  Lewellyn,  Collector,  p.  913. 

A  federal  trial  court  should  not  make  a  finding  that  an  exaction  called 
by  Congress  a  tax  is  in  fact  a  penalty,  the  enforcement  of  which  may  be 
enjoined   under   appropriate  circumstances,   but   the   duty   of   making  such  a 
finding  of  facts  should  be  left  to  a  court  of  final  jurisdiction. 
Wassel  V.  Lederer,  Collector,  p.  1006. 

A  so-called  tax  which  lacks  all  the  ordinary  characteristics  of  a  tax, 
whose  primary  function  is  to  provide  for  the  support  of  a  government,  and 
clearly  involves  the  idea  of  punishment  for  infraction  of  the  law,  is  a  penalty 
and  must  be  so  regarded  in  spite  of  the  use  of  the  word  "tax." 
Lipke  V.  Lederer,  Collector,  p.  924, 

A  taxpayer  may  maintain  a  suit  for  an  injunction  to  restrain  a  state 
oflacer  from  selling  his  property  under  an  illegal  tax. 
Purnell  v.  Page,  Sheriff,  p.  419. 

(6)    Limitations 

The  Statute  of  Limitations  does  not  run  against  the  government  in 
collecting  a  debt. 

United  States  v.  Guest,  p.  543. 


812  545  U.  S.  TAX  CASES 

The  limitation  in  the  act  of  August  5,  1909,  applies  to  statutory  sum- 
mary proceedings  for  the  collection  of  tax  but  not  to  a  suit  by  the  govern- 
ment. 

United  States  v.  Grand  Eapids  &  I.  Ry.  Co.,  p.  541. 

United  States  v.  Minneapolis  Threshing  Machine  Co.,  p.  552. 

United  States  v.  Nashville,  C.  &  St.  L.  Ey.,  p.  553. 

The  discovery  and  assessment  of  an  additional  tax  in  cases  of  refusal 
or  neglect  to  make  a  return  and  in  cases  or  false  or  fraudulent  returns, 
under  the  Act  of  October  3,  1913,  must  be  made  within  three  years  from  the 
time  when  the  return  is  due. 

Dupont  V.  Graham,  Collector,  p.  882. 

(7)    Compromise 
A  compromise  of  a  criminal  proceeding  bars  a  civil  suit  upon  a  bond, 
based  upon  the  same  offense. 

United  States  v.  Chouteau,  p.  531. 

A  compromise  bars  criminal  prosecution. 
Eau  V.  United  States,  p.  422. 

Acceptance  not  only  of  tax  but  also  of  penalty  and  statement  by  col- 
lector or  a  deputy  collector  that  such  payment  would  end  matter  after  ad- 
mission of  guilt,  was  a  "compromise." 

Eau  v.  United  States,  p.  422. 

Willingham  v.  United  States,  p.  608. 

(8)    Application  of  Payments 
The  collector  has  no  authority  to  apply  to  one  item  money  deposited 
expressly  to  apply  to  another. 

Bought  on  V.  United  States,  p.  103. 

The  action  of  the  Commissioner  in  applying  an  overpayment   of  tax 
against  another  tax  alleged  to  be  due  held  to  be  unauthorized  and  arbitrary. 
Vaughan  et  al.,  Executors  v.  Eiordan,  Collector,  p.  1002. 

(B)    Abatement  and  Befund 
(1)    Review  of  Administrative  Action 
A  writ  of  certiorari  will  not  issue  to  review  the  action  of  an  executive 
officer  of  the  United  States,  as  it  is  not  judicial.    The  remedy  lies  in  starting 
a  suit. 

Degge  V.  Hitchcock,  Postmaster  General,  p.  176. 
First  National  Bank  of  Greencastle  v.  United  States,  p.  212. 
Given  a  claim  where  the  Commissioner  has  jurisdiction,  his  decision  on 
the  merits  thereof,  in  the  absence  of  fraud  or  mistakes  in  mathematical 
calculation,  is  final  and,  therefore,  not  subject  to  revision  by  any   other 
executive  officers,  such  as  accounting  officers. 
Dugan  V.  United  States,  p.  188. 
United  States  v.  Savings  Bank,  p.  570, 
First  National  Bank  of  Greencastle  v.  United  States,  p.  212. 
Woolner  v.  United  States,  p.  613. 
The  decision   of  the   Commissioner  in   favor   of  the   taxpayer,   in   the 
absence  of  fraud  or  mistake,  is  an  award  all  sufficient  for  the  foundation 
of  a  judgment. 

Edison  Elec,  etc.,  Co.,  v.  United  States,  p.  192. 
United  States  v.  Kaufman,  p.  547. 
Woolner  v.  United  States,  p.  613. 
Sybrandt  et  al.  v.  United  States,  p.  498. 


545  U.  S.  TAX  CASES  818 

In  the  absence  of  fraud  or  illegality,  the  Commissioner's  decision  as  to 
whether  or  not  the  claim  reached  his  office  in  due  time  is  conclusive  on  the 
court. 

First  National  Bank  of  Greencastle  v.  United  States,  p.  212. 
Inasmuch  as  the  processes  of  the  Treasury  Department  are  all  ex  parte, 
the   Commissioner's   decision  allowing  refund   is  not   finally   consummated 
beyond  recall  by  him  until  a  check  has  been  issued  upon  a  warrant  duly 
signed  by  the  Secretary  of  the  Treasury. 

Eidgway  v.  United  States,  p.  430. 
Under  Section  3220,  Revised  Statutes,  requiring  the  Commissioner  to 
transmit  a  case  to  the  Secretary  of  the  Treasury  for  his  consideration  and 
advisement,  the  Commissioner  is  not  bound  by  the  decision  of  the  Secretary 
of  the  Treasury,  which  is  only  advisory  under  the  statute. 
Sybrandt  et  al.  v.  United  States,  p.  498. 
It  is  not  part  of  the  duties  of  the  Auditors  (except  the  Sixth  Auditor)  to 
make  decisions  binding  in  any  way  upon  anybody. 
Eidgway  v.  United  States,  p.  430. 
See   also   supra,  the   point,   Collection   of   Taxes,    (5)    Suits   to   Enjoin 
Collection. 

(2)    Effect  of  Abatement 
Abatement  of  tax  and  notice  thereof  cancels  liability   on   abatement 
bond,  and  reimposition  of  tax  does  not  revive  bond. 

United  States  v.  Alexander  et  al.,  p.  520. 

(3)    Claim  for  Refund  and  Credit 
The   Commissioner   has   power   to   pay   back    all   taxes   erroneously   or 
illegally  collected. 

Dugan  v.  United  States,  p.  188. 
Claim  for  credit  for  overpayment  of  taxes  was  first  permitted  by  the 
Eevenue  Act  of  1918. 

A.  E.  M.  46,  p.  689. 
A  claim  for  credit  has  precisely  the  same  effect  as  a  claim  for  abate- 
ment, and  by  forbearance  of  the  collector  it  may  suspend  collection  until 
it  is  acted  upon  by  the  Commissioner. 
A.  E,  M.  46,  p.  689. 

If  a  claim  for  credit  is  allowed,  the  collector  and  the  taxpayer  are 
relieved  from  further  liability;  if  rejected,  interest  is  to  be  paid  on  the 
amount  suspended,  from  the  time  it  was  due. 
A.  E.  M.  46,  p.  689. 

For  limitations  upon  time  for  filing  claim  for  refund,  see  \inder  next 
point  of  this  synopsis,  (C)  Suit  to  Eecover  Tax  Paid,  (3)  Limitations. 

(C)    Suit  to  Recover  Tax  Paid 
(1)    Necessity  for  Involuntary  Payment 

No  action  lies  for  the  recovery  of  a  tax  unless  it  was  paid  under  pro- 
test or  duress. 

Chesebrough  v.  United  States,  p.  136. 

Elliott  V.  Swartwout,  p.  201. 

Dugan,  et  al.  v.  Miles,  Collector,  p.  880. 

Fox  V.  Edwards,  p.  896. 

The  Proctor  &  Gamble  Companv  v.  United  States,  p.  964. 

United  States  v.  N.  Y.  &  Cuba  Mail  S.  S.  Co.,  p.  555. 

Vaughn,  et  al.,  Executors  v.  Eiordan,  CoUeetor,  p.  1002. 


814  545  U.  S.  TAX  CASES 

Merk  v.  Treat,  Collector,  p,  349. 

Bock  Island,  Ark.  &  La.  E.  Co.  v.  United  States,  p.  436. 

Union  Pacific  R.  Co.  v.  Dodge,  p.  516. 

Statutes  granting  the  right  to  sue  for  taxes  paid  under  protest  have  no 
application  to  payments  of  penalties. 

Lipke  V.  Lederer,  Collector,  p.  924. 

While  a  tax  illegally  assessed  and  collected  may  be  recovered  back  by 
suit,  it  is  not  contemplated  by  any  provision  of  law  that  one  who  is  forced 
to  pay  any  illegal  penalty  can  recover  it  back  by  suit. 

Fontenot,  Collector  v.  Accardo,  p.  895;  same  case  below,  p.  222. 

A  suit  will  lie  to  recover  a  penalty  assessed  and  collected  without  war- 
rant of  law. 

Schafer  v.  Craft,  Collector,  p.  973. 

The  penalty  of  1%  paid  under  protest  on  an  illegal  assessment  may 
be  recovered. 

Camp  Bird,  Ltd.,  v.  Howbert,  Collector,  p.  123. 

Under  the  Revenue  Act  of  1918  the  taxpayer  has  a  right  to  the  refund 
of  taxes  wrongfully  collected,  without  proof  of  duress  or  protest,  in  spite 
of  Revised  Statutes,  Section  3228. 

Greenport  Basin  &  Con.  Co.  v.  United  States,  p.  242. 

Objection  by  claim  for  abatement  when  computation  made,  without 
protest  at  time  of  payment,  is  sufficient  protest. 

Greenport  Basin  &  Con.  Co.  v.  United  States,  p.  242. 

Oral  protest  noted  by  the  collector  on  the  receipt,  when  the  parties  un- 
derstood that  if  the  tax  was  not  paid  the  law  would  be  enforced,  shows 
payment  under  duress. 

Shaefer  v.  Ketchum,  p.  447. 

Payment  was  held  to  be  involuntary  where,  after  oral  protest,  the 
collector  threatened  the  enforcement  of  the  penalties  of  fine  and  imprison- 
ment and  the  tax  was  then  paid  with  a  written  protest. 

Home  T.  &  T.  Co.  v.  City  of  Los  Angeles,  p.  262. 

Payment  of  tax  under  protest  upon  demand  of  collector,  coupled  with 
threat  that  unless  promptly  paid,  the  same  would  be  collected  with  penalty 
and  interest,  constitutes  such  duress  as  clearly  makes  the  payment  invol- 
untary. 

Herold,  Collector,  v.  Kahn  et  al.,  p.  257. 

When  taxes  are  paid  under  protest  that  they  are  being  illegally  ex- 
acted, or  with  notice  that  the  taxpayer  contends  that  they  are  illegal  and 
intends  to  institute  suit  to  compel  their  repayment,  a  sufficient  foundation 
for  a  suit  has  been  established. 

Herold,  Collector,  v.  Kahn  et  al.,  p.  257. 

Payment  of  tax  after  written  protest,  signed  by  the  taxpayer,  with 
statement  of  definite  grounds  of  objection  to  tax  demanded  and  paid,  is  suffi- 
cient protest. 

Nichols  V.  United  States,  p.  371. 

Af&xing  of  revenue  stamps  under  Act  of  June  13,  1898,  after  written 
protest  stating  grounds  and  that  stamps  were  being  affixed  under  duress, 
is  sufficient  to  sustain  recovery. 

Merk  v.  Treat,  Collector,  p.  349. 


545  U.  S.  TAX  CASES  815 

Payment  of  a  tax  by  one  not  subject  to  the  tax  by  the  statute  is  vol- 
untary even  though  the  formalities  of  protest  are  gone  through. 
Gaar,  Scott  &  Co.  v.  Shannon,  p.  226. 

Payment  of  stamp  tax  on  goods  sold  unstamped,  even  though  under  writ- 
ten protest  made  after  the  goods  were  sold,  is  voluntary  as  there  was  no 
duress  of  goods. 

Merk  v.  Treat,  Collector,  p.  349. 

Affixing  of  revenue  stamps  to  a  manifest  to  obtain  clearance  for  a  ves- 
sel, without  presenting  any  claim  of  protest  to  collector  of  internal  revenue 
or  to  collector  of  port,  is  voluntary . 

United  States  v.  New  "York  &  Cuba  Mail  S.  S.  Co.,  p.  555. 

Written  protest  at  the  time  of  payment  of  tax  is  inadequate  to  make 
payment  involuntary. 

Union  Pacific  E.  Co.  v.  Dodge,  p.  516. 

The  mere  fact  that  a  taxpayer  for  a  long  time  refused  to  make  a  return 
and  afterward  brought  a  suit  to  recover  the  tax  after  it  was  finally  paid 
without  protest,  does  not  warrant  the  assumption  that  such  refusal  was 
based  upon  illegality  of  the  tax. 

Beer  et  al.  v.  Moffatt,  Collector,  p.  88. 

Where  the  commissioner  retained  an  overpayment  of  tax,  as  shown  by 
a  federal  estate  tax  return,  applying  it  on  a  tax  which  he  claimed  the  estate 
owed  for  a  gift  alleged  to  have  been  in  contemplation  of  death,  held  that 
this  action  was  unauthorized  and  arbitrary,  and  that  the  amount  so  retained 
and  irregularly  applied  without  consent,  could  not  be  considered  as  a  volun- 
tary payment  on  the  tax  alleged  to  be  due. 

Vaughn  et  al..  Executors  v.  Eiordan,  Collector,  p.  1002. 

Even  though  an  assessment  is  void,  a  taxpayer,  paying  the  same  under 
protest,  is  not  entitled  to  recovery  in  an  action  against  the  collector,  if  it 
appears  that  the  tax  was  justly  due  from  him,  there  being  no  implied 
promise  for  its  return. 

Penrose  v.  Skinner,  Collector,  p.  956. 

A  taxpayer  cannot  by  suit  recover  any  taxes  once  paid,  which  in  fact 
were  due,  even  though  the  exact  manner  of  their  collection  was  not 
authorized. 

Schafer  v.  Craft,  Collector,  p.  973. 

(2)    Necessity  for  Appeal 

Failure  to  appeal  to  the  Commissioner  of  Internal  Eevenue,  as  required 
by  statute,  bars  suits  for  recovery  of  taxes  illegally  assessed,  in  state  courts 
as  well  as  in  Federal  courts. 

Collector  v.  Hubbard,  p.  151. 

Cheatham  v.  United  States,  p.  134. 

Eock  Island,  etc.,  Co.  v.  United  States,  p.  436. 

Kings  County  Savings  Inst.  v.  Blair,  Collector,  p.  286. 

A  failure  to  file  claim  for  refund  is  no  bar  to  a  suit  where,  after  re- 
jection of  a  claim  for  abatement,  the  taxpayer  was  advised  by  the  Commis- 
sioner that  he  need  not  file  a  claim  for  refund. 
Black  V.  Bolen,  Collector,  p.  95. 

Where  upon  appeal  the  first  assessment  is  set  aside  and  a  new  assess- 
ment made,  appeal  must  be  taken  from  the  last  assessment  before  recovery 
will  be  allowed. 

Cheatham  v.  United  States,  p.  134. 


816  545  U.  S.  TAX  CASES 

Appeal  must  be  made  after  payment  of  the  tax,  by  claim  for  refund. 
Eock  Island,  etc,  E.  Co.  v.  United  States,  p.  436. 
Savings  Institution  v.  Blair,  p.  443. 

Where  appeal  to  Commissioner  is  taken  before  payment  of  tax,  appeal 
after  payment  is  unnecessary. 

Loomis,  Collector  v.  Wattles,  p.  313. 
DeBary  et  al.  v.  Dunne,  Collector,  p.  173. 
Weaver,  Collector  v.  Ewers,  p.  1007. 

The  fact  that  the  filing  of  a  claim  by  a  taxpayer,  suing  to  recover  an 
amount  of  tax  alleged  to  have  been  erroneously  paid,  would  have  been  a 
useless  ceremony  cannot  justify  his  failure  to  file  such  claim. 
Band  v.  United  States,  p.  966. 

Claims  for  refund  of  a  legacy  tax  made  on  behalf  of  the  trustee  of  an 
estate  and  the  personal  representative  of  the  deceased  can  not  be  ascribed 
to  the  legatee  so  as  to  support  an  action  by  such  legatee  against  the  United 
States  for  recovery  of  the  tax. 

Band  v.  United  States,  p.  966. 

Where  a  taxpayer  requested  a  ruling  of  the  Commissioner  as  to  the  tax- 
ability of  certain  transfers  and  apparently  acquiesced  in  the  ruling  handed 
down,  a  claim  for  refund  of  the  taxes  paid,  filed  after  the  running  of  the 
statute  of  limitations,  cannot  be  treated  as  an  amendment  of  a  claim  pre- 
viously filed  so  as  to  avoid  the  bar  of  the  statute. 

Baltimore  &  Ohio  Eailroad  Co.  v.  United  States,  p.  843. 

Protest  endorsed  on  checks  and  making  of  prescribed  amended  returns 
with  protest  and  claim  written  thereon,  are  not  adequate  presentation  of 
claim  for  refund. 

Savings  Institution  v.  Blair,  p.  443. 

Evidence  showing  an  appeal  to  be  endorsed  "examined  and  rejected" 
with  signature  of  a  person  unknown  to  the  court,  is  insufdcient  to  establish 
appeal  to  Commissioner  and  decision  by  him. 
Laurer  v.  United  States,  p.  303. 

Appearance  by  the  collector  does  not  waive  statutory  requirements 
of  appeal  to  the  Commissioner. 

DeBary  et  al.  v.  Dunne,  Collector,  p.  173. 
The  effect  of  filing  a  claim  for  refund  of  a  tax  is  not  extinguished  by 
a  judgment  in  a  suit  against  a  collector  and  so,  a  suit  against  the  United 
States  may  subsequently  be  instituted  without  the  filing  of  a  new  claim. 
Sage  et  al.,  Executors  v.  United  States,  p.  971. 

(3)    Limitations 

When  the  United  States  gives  consent  to  the  issuance  of  process  against 
it,  provided  the  process  issue  within  a  limited  time,  this  limitation  is  strictly 
a  condition  of  the  remedy  given,  and  not  a  statute  of  limitations  in  bar  of 
the  action;  whereas  statutes  limiting  the  time  of  bringing  the  common  law 
right  of  action  against  tax  collectors  are  strictly  and  technically  statutes 
of  limitations. 

Mill  Creek  &  Minehill  Nav.  &  E.  Co.  v.  United  States,  p.  943. 

In  a  suit  against  the  United  States  in  the  Court  of  Claims,  the  filing  of 
the  petition  determines  the  question  of  whether  the  proceedings  has  been 
begun  in  time,  but  if  the  action  be  brought  in  the  District  Court  by  writ  of 
summons,  the  question  is  to  be  determined  by  the  date  of  the  writ. 

Mill  Creek  &  Minehill  Nav.  &  E.  Co.  v.  United  States,  p.  943. 


545  U.  S.  TAX  CASES  817 

The  Eevenue  Act  of  1916,  permitting  a  taxpayer  to  file  a  claim  for 
refund  of  taxes  collected  under  the  1909  and  1913  Acts  notwithstanding  E.  S. 
Sec.  3228,  which  requires  a  claim  for  refund  to  be  made  within  two  years, 
permits  a  suit  to  recover  taxes  unlawfully  collected  where  the  claim  for 
refund  made  thereunder  was  erroneously  rejected;  the  cause  of  action  for 
such  taxes  accrues  at  the  time  of  such  rejection  within  E.  S.  Sec.  3227, 
requiring  suit  to  be  brought  within  two  years  after  the  cause  of  action 
accrues. 

Public  Service  Corporation  v.  Herold,  p.  965;  reversing  case 
below,  p.  415. 

The  cause  of  action  for  filing  a  claim  for  refund  accrues  when  the  tax 
is  paid. 

Wright  V.  Blakeslee,  p.  614. 

A  claim  for  refund  of  taxes  must  be  presented  within  two  years  after 
they  were  paid. 

New  York  Mail  &  Newspaper  Trans.  Co.  v.  Anderson,  p.  364. 
Public  Service  Ey.  Co.  v.  Herold,  p.  414. 

The  lodging  of  an  appeal  with  the  collector  was  a  legal  presentation 
to  the  Commissioner  within  the  prescribed  time. 

United  States  v.  Savings  Bank,  p.  570. 

Where  the  Commissioner  delays  decision  beyond  the  time  fixed  in  the 
statute,  the  claimant  has  an  option  to  treat  the  delay  as  denial  and  sue 
pending  appeal,  or  wait  until  decision  and  then  sue  within  the  statutory 
period  thereafter. 

Arnson  v.  Murphy,  Collector,  p.  77. 

James,  Admr.,  v.  Hicks,  p.  275. 

The  cause  of  action,  in  a  suit  against  a  collector,  first  accrues  when 
the  Commissioner  renders  a  decision  on  the  claim  for  refund. 
Wright  V.  Blakeslee,  p.  614. 
State  Line  &  S.  E.  Co.  v.  Davis,  p.  485. 
Arnson  v.  Murphy,  Collector,  p.  77. 

Although  no  decision  was  rendered  by  the  Commissioner  on  appeal,  yet 
the  statute  was  held  to  have  run. 

Christie-Street  Com.  Co.  v.  United  States,  p.  141. 
The  last  appeal  is  treated  as  the  basis  for  determining  the  time  within 
which  plaintiff  must  bring  suit. 

James,  Admr.,  v.  Hicks,  p.  275. 
The  United  States  having  given,  by  the  Eevenue  Act  of  1916,  statutory 
authority  to  bring  suit,  where  without  such  authority  suit  would  have  been 
barred  by  the  statute  of  limitation,  it  thereby  signified  that  it  did  not  stand 
on  any  previous  litigation  between  it  and  the  taxpayer  to  create  the  defense 
of  res  adjudicata. 

Public  Service  Corporation  v.  Herold,  p.  965. 

A  state  statute  of  limitations  cannot  bar  an  action  to  recover  federal 
taxes. 

Arnson  v.  Murphy,  Collector,  p.  77. 

(4)    Jurisdictional  Amount 
A  suit  arising  under  the  revenue  laws  is  a  suit  under  a  statute  and, 
therefore,  the  amount  in  dispute  need  not  exceed  $2,000  in  order  for  the 
Circuit  Court  of  the  United  States  to  have  jurisdiction. 
Ames  v.  Hogan,  p.  71. 


818  545  U.  S.  TAX  CASES 

(5)    Setroactive  Iiogislation 

An  act  prescribing  additional  procedure  for  the  recovery  of  taxes  can- 
not have  a  retroactive  effect,  as  the  right  is  vested. 
Hubbard  v.  Brainard,  p.  266. 

(6)    Counter-Claim 

In  a  suit  for  the  recovery  of  money  deposited  for  a  special  object,  col- 
lector may  set  up  as  a  counter-claim  any  taxes  due. 
Boughton  V.  United  States,  p.  103. 
Where  taxpapers  recover  a  judgment  against  the  collector  because  they 
were  taxed  as  an  association  when  they  should  have  been  taxed  as  trustees, 
the  collector  will  be  required  to  pay  back  only  the  excess  of  the  amount 
paid,  over  the  amount  properly  payable  as  trustees. 

Crocker  et  al..  Trustees  v.  Malley,  Collector,  p.  161. 

(7)    Parties 

A  suit  against  the  collector  is  not  against  the  United  States. 
Conant  v.  Kinney,  p.  159. 

A  judgment  of  a  district  court  in  a  suit  against  the  collector  is  not  a 
judgment  against  or  in  favor  of  the  United  States,  since  the  suit  is  a  per- 
sonal one,  and  so  such  a  judgment  is  not  a  bar  to  a  subsequent  action  against 
the  United  States. 

Sage  et  al.,  Executors  v.  United  States,  p.  971. 

Jurisdiction  is  given  to  the  District  Courts  to  determine  the  justness  of 
claims  against  United  States  and  for  all  purposes  of  procedure  the  United 
States  is  to  be  regarded  as  is  any  other  defendant,  and  may  be  brought  in 
by  summons  served  on  the  district  attorney. 

Mill  Creek  &  Minehill  Nav,  &  E.  Co.  v.  United  States,  p.  943. 

Where  claim  for  refund  is  disallowed,  an  action  lies  against  the  col- 
lector. 

Edison  Elec,  etc.,  Co.  v.  United  States,  p.  192. 

But  not  against  his  successor  in  office. 

Detroit  Hotel  Co.  v.  Brady,  Collector,  p.  878. 
Eoberts  v.  Lowe,  Collector,  p.  434. 
Cincinnati  G.  &  E.  Co.  v.  Gilligan,  Collector,  p.  142. 
Smietanka,  Collector  v.  Indiana  Steel  Co.,  p.  980. 

A  collector  who  had  not  part  in  the  collection  or  disbursement  of  a  tax 
assessed  and  collected  by  his  predecessor  in  office  may  not  be  brought  in  as 
a  party  to  a  suit  begun  while  the  latter  was  still  in  office  to  recover  back 
the  amount  of  the  tax  as  having  ^een  unlawfully  collected. 

Union  Trust  Company  v.  Wardell,  Collector,  p.  990. 

Suit  against  collector  does  not  abate  by  reason  of  his  death  or  expira- 
tion of  his  term  of  office. 

Phila.  H.  &  P.  E.  Co.  v.  Lederer,  Collector,  p.  405. 
The  general  provision  in  the  Act  of  February  8,  1919,  to  the  effect  that 
a  suit  by  or  against  an  officer  of  the  United  States  in  his  official  capacity 
shall  not  abate  by  reason  of  his  death,  etc.,  supposes  a  suit  begun  against 
an  officer  in  his  lifetime. 

Smietanka,  Collector  v.  Indiana  Steel  Co.,  p.  980. 
When  taxes  are  paid  under  protest,  collector  is  personally  responsible. 
Elliott  V.  Swartwout,  p.  201. 
Atchison,  T.  &  S.  F.  Ey.  Co.  v.  O  'Connor,  p.  81. 


545  U.  S.  TAX  CASES  819 

The  collector  cannot  exonerate  himself  from  personal  responsibility  for 
a  tax  paid  under  protest  by  paying  the  tax  over  to  his  principal. 
Elliott  V.  Swartwout,  p.  201. 

Where  a  claim  for  refund  is  allowed  and  payment  is  refused  for  any 
reason,  suit  may  be  brought  directly  against  the  United  States  in  the 
Court  of  Claims. 

Edison  Elec,  etc.,  Co.  v.  United  States,  p.  192. 
United  States  v.  Kaufman,  p.  547. 
Suit  to  recover  taxes  exacted  under  a  misconstruction  of  the  revenue 
law  may  be  brought  directly  against  the  United  States  whether  or  not  the 
claim  has  received  the  approval  of  the  Commissioner  and  whether  the  action 
be  in  tort  or  in  contract. 

Christie-Street  Com.  Co.  v.  United  States,  p.  141. 
The  government  is  a  necessary  party  in  a  suit  affecting  its  interests, 
such  as  an  action  to  set  aside  a  sale  made  by  a  collector. 
Gouge  V.  Hart,  Collector,  p.  236. 
In  a  suit  to  subject  property  to  the  payment  of  tax,  the  taxpayer  and 
all  who  might  have  acquired  interests  in  the  property  are  necessary  parties 
defendant. 

United  States  v.  Curry,  p.  534. 
A  lessee  paying  the  tax  of  his  lessor  under  protest,  to  prevent  a  dis- 
traint on  the  property  leased,  may  sue  to  recover  same,  even  though  there 
is  no  privity  between  him  and  the  collector. 

Cambria  Steel  Co.  v.  McCoach,  Collector,  p.  121. 

(D)    Rules  of  Practice  and  Procedure 
(1)     Pleading  and  Procedure 

A  declaration  which  does  not  allege  that  the  tax  sought  to  be  recovered 
was  paid  under  protest  or  duress  is  subject  to  demurrer. 
Dugan  et  al.  v.  Miles,  Collector,  p.  880. 
The  Proctor  &  Gamble  Company  v.  United  States,  p.  964. 

Even  though  a  count  in  a  declaration  makes  claim  for  recovery  of  a 
larger  amount  of  tax  than  the  plaintiff  is  entitled  to  recover,  it  is  not  bad 
if  it  discloses  on  its  face  a  legal  right  to  a  judgment  for  something. 
Dugan  et  al.  v.  Miles,  Collector,  p.  880. 

Since  the  Judicial  Code  (Act  of  March  3,  1911),  granting  jurisdiction 
to  District  Courts  concurrently  with  the  Court  of  Claims  on  suits  against 
the  United  States  with  some  exceptions,  prescribes  no  special  method  of 
procedure,  the  District  Courts  may  follow  their  established  practice,  or  may 
adopt  that  established  for  the  guidance  of  the  Court  of  Claims. 

Mill  Creek  &  Minehill,  Nav.  &  E.  Co.  v.  United  States,  p.  943. 

(2)     Burden  of  Proof 

In  a  suit  by  the  government  to  recover  taxes,  the  burden  of  proof  is 
upon  the  government. 

Little  Miami,  etc.,  R.  R.  Co.  v.  United  States,  p.  312. 

The  plaintiff  has  the  burden  of  making  out  his  case  in  a  suit  to  recover 
an  exacted  tax  payment. 

Cadwalader  v.  Lederer,  p.  617;  affirmed,  p.  920. 
Cohen  v.  Lowe,  p.  147. 
Germantown  Trust  Co.  v.  Lederer,  p.  229. 
Lincoln  Chemical  Co.  v.  Edwards,  p.  310. 


820  545  U.  S.  TAX  CASES 

In  a  suit  to  recover  taxes  illegally  collected,  the  burden  of  showing  a 
previous  payment  rests  on  the  plaintiff. 

Hurst  V.  Lederer,  Collector,  p.  910. 

The  burden  of  showing  fraud  or  mistake  in  the  Commissioner's  award 
in  favor  of  a  taxpayer  is  on  the  government. 

Edison  Elec,  etc.,  Co.  v.  United  States,  p.  192. 

(3)     SufSciency  of  Evidence 

The  assessment  by  the  Commissioner  is  presumed  at  the  trial  to  make  a 
prima  facie  case.  This  prima  facie  case  may  be  overcome  by  adequate  evi- 
dence, in  which  event  the  collector  thereafter  has  the  burden  of  going  for- 
ward with  the  evidence. 

Bernheim  Distilling  Co.  v.  Mayes,  p.  89, 

Mayes,  Collector  v.  United  States  Trust  Co.,  p.  935. 

Where  a  tax  is  levied  on  one  theory,  the  court  will  not  permit  a  change 
to  a  new  theory  in  order  to  sustain  the  tax. 

Loomis,  Collector,  v.  Wattles,  p.  313. 

To  recover  it  is  not  sufficient  to  show  merely  that  the  Commissioner 
proceeded  without  proper  evidence,  or  otherwise  erroneously,  but  the  tax- 
payer must  show  that  the  tax  collected  or  some  part  of  it  was  not  due. 
Anderson  v.  Farmers'  Loan  &  Trust  Co.,  p.  72. 

Evidence  showing  an  appeal  to  be  endorsed  "examined  and  rejected" 
with  the  signature  of  a  person  unknown  to  the  court  is  insufficient  to  estab- 
lish an  appeal  to  Commissioner  of  Internal  Eevenue  and  a  decision  by  the 
Commissioner. 

Laurer  v.  United  States,  p.  303. 

Where  the  statute  requires  that  records  be  kept,  the  books  of  the  tax- 
payer constitute  the  best  evidence  in  the  case  and  until  it  is  shown  that  they 
cannot  be  produced,  or  do  not  contain  the  information  required,  no  evidence 
of  the  facts  required  to  be  recorded  is  admissible. 
BergdoU  v.  Pollock,  p.  850. 

(4)     Costs  and  Interest 

Costs  should  be  allowed  a  taxpayer  in  a  suit  against  a  collector,  if 
successful. 

DeBary  v.  Carter,  p.  172. 

Treat,  Collector  v.  Farmers'  Loan  &  Trust  Co.,  p.  508. 

The  United  States  is  entitled  to  interest  on  the  amount  of  tax  due, 
unless  forbidden  by  statute. 

Billings  V.  United  States,  p.  92. 

Where  a  tax  is  recoverable  by  the  taxpayer,  interest  thereon  is  prop- 
erly included  in  the  judgment  if  the  action  is  against  the  collector. 
Conant  v.  Kinney,  p.  159. 

Boston  P.  R.  Corporation  et  al.  v.  Gill,  p.  118. 
Klock  Produce  Co.  v.  Hartson,  p.  288. 

New  York  Mail  &  Newspaper  Trans.  Co.  v.  Anderson,  p.  364. 
Park  V.  Gilligan,  p.  393. 
State  Line  &  S.  E.  Co.  v.  Davis,  p.  485. 
Treat  v.  Farmers'  Loan  &  Trust  Co.,  p.  508. 

But  no  interest  is  recoverable  if  the  action  is  against  the  United  States. 
United  States  ex  reL  Angarica  v.  Bayard,  p.  524. 


545  U.  S.  TAX  CASES  821 

A  suit  against  the  collector  is  not  against  the  United  States. 
Conant  v.  Kinney,  p.  159. 

Where  taxes  were  originally  paid  without  protest,  no  appeal  was  taken 
to  the  Commissioner,  and  no  demand  made  for  repayment,  interest  cannot 
be  recovered. 

Commissioner  v.  Buchner,  p.  153. 

Delay  in  prosecution  of  a  case  at  the  suggestion  of  the  collector  is  no 
defense  to  the  allowance  of  interest. 

Boston  &  P.  E.  Corporation  et  al.  v.  Gill,  Collector,  p.  118. 

Acceptance,  without  objection,  of  the  sum  which  the  government 
illegally  exacted  bars  recovery  of  interest. 

Stewart  v.  Barnes,  Collector,  p.  490. 

(5)    Appeal  and  Error 

The  contention  that  a  fund  taxed  as  income  was  not  income  within  the 
scope  of  the  Sixteenth  Amendment  is  suflScient  to  sustain  a  writ  of  error. 
Merchants  Loan  &  Trust  Co.  v.  Smietanka,  p.  345. 
Towne  v.  Eisner,  p.  500. 

Where  question  is  one  of  law  and  the  ease  is  to  have  an  appellate 
experience,  a  new  trial  will  not  be  granted  by  trial  court. 

Cadwalader  v.  Lederer,  Collector,  p.  617;  af&rmed,  p.  920. 

(E)    Jurisdiction  of  Courts 

A  suit  in  equity  by  the  executors  of  an  estate  against  the  collector  indi- 
vidually and  as  collector  to  restrain  him  from  collecting  an  estate  tax  is  one 
involving  a  controversy  arising  under  the  laws  of  the  United  States  and 
hence  the  federal  court  has  jurisdiction  thereof. 

Nichols,  collector,  v.  Gaston,  et  al..  Executors,  p.  949. 

Where  the  United  States  refuses  to  state  whether  it  will  claim  an  income 
tax  on  a  sum  of  money  received  by  the  receivers  of  a  corporation  before  the 
due  date  of  the  tax,  the  court  is  without  power  to  pass  on  the  rights  of  the 
United  States  as  to  any  moneys  received  during  that  year  and  asserted  to 
be  income  by  the  taxing  authorities,  where  such  authorities  refuse  to  con- 
sent to  an  adjudication. 

Pennsylvania  Cement  Co.  v.  Bradley  Contracting  Co.,  p.  954. 

Under  the  Bankruptcy  Act,  the  bankruptcy  court  may  pass  upon  the 
validity  of  the  tax  in  the  first  instance  where  the  Government  has  filed  proof 
of  claim  against  the  bankrupt;  the  claim  will  not  be  ordered  paid  as  a  mat- 
ter of  course  and  the  trustee  left  to  his  remedy  by  way  of  claim  for  refund. 

In  re  General  Film  Corporation,  p.  901. 

In  re  Williams  Oil  Corporation,  p.  1010. 

The  bankruptcy  court  has  jurisdiction  to  proceed  in  invitum  to  liquidate 
an  income  tax  and  notice  to  the  Collector  of  Internal  Eevenue  for  the  dis- 
trict is  sufficient  as  a  condition  precedent  to  such  proceedings. 
In  re  Anderson,  p.  837. 

If  the  powers  to  tax  are  exercised  oppressively,  the  responsibility  of 
the  legislature  is  not  to  the  courts,  but  to  the  people  by  whom  its  members 
are  elected. 

Flint  V.  Stone-Tracy  Co.,  p.  217. 


822  545  U.  S.  TAX  CASES 

The  measurement  of  a  corporation  tax  by  net  income  or  by  invested 
capital  is  not  beyond  the  power  of  Congress  as  arbitrary,  for  the  selection 
of  the  measure  and  objects  of  taxation  devolves  upon  Congress  and  not  upon 
the  courts,  as  long  as  the  tax  does  not  amount  to  confiscation. 

Flint  V.  Stone-Tracy  Co.,  p.  217. 

La  Belle  Iron  Works  v.  United  States,  p.  294. 

Whether  the  amount  of  money  on  hand  or  the  amount  received  during 
the  year  shall  be  taken  as  the  measure  of  the  property  to  be  taxed  is  a 
legislative  and  not  a  judicial  question. 

In  re  Opinion  of  Justices,  p.  383. 

A  state  court  has  no  jurisdiction  to  hear  and  determine  the  amount  of 
taxes  legally  due  the  United  States  from  a  corporation. 
In  re  Application  of  Willman,  et  al.,  p.  611. 

As  to  the  jurisdiction  of  courts  to  enjoin  the  collection  of  federal  taxes, 
see  the  point  above,  (A)  Collection  of  Taxes,  (5)  Suits  to  Enjoin  Collection. 
See  also,  above,  (B)  Abatement  and  Eefund,  (1)  Eeview  of  Administrative 
Action. 

(F)    Begulations  by  the  Treasury  Department 
(1)    Power  to  Make 
To  invest  the  Secretary  of  Treasury  with  authority  to  prescribe  regula- 
tions not  inconsistent  with  the  law,  for  the  conduct  of  the  business  of  his 
department,  is  not  inconsistent  with  the  Constitution  of  the  United  States. 
Brushaber  v.  U.  P.  Eailroad  Co.,  p.  107. 
Boske  V.  Comingore,  p.  98. 

The  Secretary  of  the  Treasury  has  the  power  to  regulate  the  mode  of 
proceedings  to  carry  into  effect  a  revenue  act  which  Congress  has  enacted. 
Morrill  v.  Jones,  p.  355. 

(2)    Effect  of 

Begulations  of  the  Commissioner  have  no  binding  force  if  they  alter, 
amend,  or  extend  the  statute. 

Greenport  Basin  &  Con,  Co.  v.  U.  S.,  p.  242, 

Morrill  v.  Jones,  p.  355. 

Cartier  et  al.  v.  Doyle,  p.  126. 

De  Laski  &  Throop  C.  W.  Tire  Co.  v.  Iredell,  p.  177. 

McNally  v.  Fields,  p.  937. 

Regulations  issued  by  the  Secretary  of  the  Treasury  with  reference  to 
internal  revenue,  and  for  the  government   of  the  officers  of  the  revenue 
department,  have  the  force  and  effect   of  law  and  are   as  binding  as  if 
incorporated  in  the  statute  law  of  the  United  States. 
Stegall  v.  Thurman,  p.  488, 

While  the  Revenue  Act  authorizes  generally  the  making  of  regulations 
by  the  Commissioner,  he  is  not  given  authority  by  a  regulation  to  nullify 
or  in  any  way  to  interfere  with  statutory  provisions  respecting  other  matters. 
In  re  Williams  Oil  Corporation,  p.  1010. 

Administrative  rulings  made  by  the  Treasury  Department  after  careful 
consideration  of  a  problem  as  it  effects  the  country  as  a  whole  ought  not 
lightly  to  be  disturbed  by  a  court. 

Western  Union  Telegraph  Company  v.  The  Delaware,  Lacka- 
wanna, etc..  Railroad  Company,  p.  1008. 


545  U.  S.  TAX  CASES  823 

The  finding  and  practice  of  the  administrative  officers  of  the  Govern- 
ment are  presumed  to  be  based  on  fair  conclusions  as  the  result  of  investiga- 
tion required  of  them  by  the  statute. 

Baltimore  Talking  Board  Co.  v.  Miles,  Collector,  p.  845. 

While  the  presumption  that  the  Department  charged  with  the  execution 
of  a  law  has  properly  interpreted  it  may  be  strengthened  in  proportion  to 
the  time  such  construction  has  obtained,  nevertheless  a  construction  of  a 
statute  by  the  Department  charged  with  the  enforcement  thereof  should  be 
given  due  consideration  regardless  of  the  length  of  time  such  construction 
has  been  adopted  and  enforced  by  that  Department. 

Dayton  Bronze  Bearing  Co.  v.  Gilligan,  p.  875. 

No  authority  has  been  vested  in  the  Commissioner  to  overrule  and 
reverse  the  action  of  his  predecessor  in  office,  and  where  a  Commissioner, 
acting  under  authority,  hears  and  determines  a  question  of  fact  necessary  to 
enable  him  to  act  intelligently  in  determining  the  amount  of  a  taxpayer's 
net  income  on  which  he  will  be  required  to  levy  an  assessment,  his  finding 
on  that  issue,  not  having  been  impeached,  should  be  regarded  as  final. 
Penrose  v.  Skinner,  Collector,  p.  956. 

But  the  decision  of  a  Commissioner  upon  the  income  tax  liability  of  a 
taxpayer  based  upon  one  question  of  fact  does  not  preclude  a  succeeding 
Commissioner  from  reopening  the  case  where  other  questions  of  fact  have 
developed  since  the  former  decision. 

Penrose  v.  Skinner,  Collector,  p.  956. 

A  regulation  of  the  Treasury  Department  with  respect  to  the  taxability 
of  telegraph  messages  transmitted  under  exchange  of  service  agreements, 
cannot  be  attacked  collaterally  in  a  suit  brought  by  a  telegraph  company 
against  a  railroad  company  to  recover  from  the  latter  the  amount  of  taxes 
on  such  messages  paid  by  it  to  the  Government  on  behalf  of  the  latter. 

Western  Union  Telegraph  Company  v.  Delaware,  Lackawanna, 
etc.,  Eailroad  Company,  p.  1008. 

The  Secretary  of  the  Treasury  may  issue  regulations  forbidding  officers 
of  the  department  to  permit  the  use  of  records  for  any  purpose  not  relating 
to  the  collection  of  revenues. 

Boske  V.  Comingore,  p.  98. 

Where  Congress  has  passed  an  act  admitting,  free  of  duty,  animals  im- 
ported for  breeding  purposes,  a  regulation  by  the  Secretary  of  the  Treasury 
that  the  animals  must  be  of  superior  stock  is  not  a  regulation  of  the  mode 
of  proceedings  to  carry  into  effect  an  act  Congress  has  passed,  but  is  an 
amendment  or  alteration  of  the  act. 
Morrill  v.  Jones,  p.  355. 

A  regulation  prohibiting  an  officer  of  the  revenue  department  to  divulge 
any  information  in  regard  to  his  business  applies  even  when  he  is  called 
as  a  witness  in  a  state  court. 

Stegall  V.  Thurman,  p.  488. 

A  provision  authorizing  Internal  Eevenue  Agents  to  examine  private 
books  and  papers  is  not  unconstitutional. 
Perry  v.  Newsome,  p.  402. 
The  rulings  of  the  Commissioner  of  Internal  Eevenue,  even  though  pub- 
lished in  an  Internal  Eevenue  Eecord,  are  not  constructions  of  such  dignity 
that  a  re-enactment  of  the  statute  subsequent  to  such  ruling  is  to  be  regarded 
as  a  legislative  adoption  of  that  construction. 

Dollar  Savings  Bank  v.  U.  S.,  p.  184. 


824  545  U.  S.  TAX  CASES 

(G)    Interpretation  of  Statutes 

A  general  intention  on  the  part  of  Congress  to  tax  all  income  cannot  be 
enforced  by  the  court  unless  carried  into  language  which  can  be  reasonably 
construed  to  effect  it,  since  the  provisions  of  such  acts  are  not  to  be  extended 
by  implication. 

Smietanka,  Collector  v.  First  Trust  &  Savings  Bank,  Trustee, 
p.  979. 

In  case  of  doubt  a  tax  law  should  be  construed  in  favor  of  the  taxpayer. 
Plant  V.  Walsh,  Collector,  p.  961. 

But  an  exemption  proviso  in  a  general  taxing  statute  should  be  strictly 
construed. 

Commercial  Health  &  Accident  Co.  v.  Pickering,  Collector,  p.  863. 

A  subsequent  act  repeals,  by  implication,  inconsistent  laws. 
Violette  v.  Walsh,  Collector,  p.  589. 

Whenever  successive  acts  of  Congress  are  acts  pari  materia,  or  upon 
the  same  matter,  they  are  to  be  construed  as  one  continuing  and  continu- 
ous act. 

United  States  v.  Smith,  p.  573. 

The  doctrine  of  ejusdem  generis  does  not  apply  to  contradict  the  intent 
of  the  statute  read  as  a  whole. 

Commonwealth  v.  Worth,  p.  158. 

A  proviso  of  an  act  which  refers  in  general  terms  to  something  that  has 
already  been  stated  wUl  be  interpreted  to  refer  only  to  the  clause  immedi- 
ately preceding  such  proviso,  when  the  meaning  of  the  other  clauses  is  well 
known  and  when  it  would  have  been  superfluous  to  add  to  the  other  clauses 
the  description  contained  in  the  proviso. 

Herold,  Collector,  v.  Park  View  Bldg,  &  Loan  Ass'n,  p.  259. 

Laws  are  not  to  be  considered  as  applying  to  cases  which  arose  before 
their  passage  unless  that  intention  be  clearly  declared, 
Shwab  V.  Doyle,  Collector,  p.  975. 

While  the  rule  is  that  statutes  should  be  so  construed  as  to  prevent  them 
from  operating  retroactively,  such  a  rule  does  not  authorize  a  judicial  re-en- 
actment by  interpretation  of  a  statute  to  save  it  from  producing  a  retro- 
active effect. 

Billings  V.  United  States,  p.  92. 

An  amendment  to  a  tax  law  fixing  a  different  rate  will  be  interpreted 
to  apply  to  the  year  in  which  the  amendment  was  passed,  if  such  is  shown 
to  be  the  intent  of  the  legislature. 

Smith  V.  Dirckx,  p.  455. 

A  license  tax  upon  all  insurance  companies,  associations,  and  societies 
is  not  repealed  by  the  general  repealing  clause  in  a  later  license  tax  act 
which  requires  a  fee  of  all  corporations  doing  business  within  the  state. 
Equitable  Life  Assurance  Society  v.  Hart,  p.  201. 

The  fact  that  judges'  salaries  were  not  expressly  exempted  by  an  act 
would  not  make  the  whole  act  unconstitutional  but  the  act  would  be  read 
as  if  such  an  exemption  were  written  in  the  act. 

Peacock  &  Co.  et  al.  v.  Pratt,  p.  395. 

Bobinson  v.  Pratt,  p.  434. 


545  U.  S.  TAX  CASES  825 

QUESTIONS  OF  CONSTITXTTIONAUTY 

(A)    Powers  of  Taxation 

(1)    Pederal 

While  the  federal  government  may  do  nothing  by  taxation  in  any  form 

to  prevent  the  full  discharge  by  a  state  government  of  its  governmental 

functions,  yet  whenever  a  state  engages  in  a  business  which  is  of  a  private 

nature,  such  business  is  not  withdrawn  from  the  taxing  power  of  the  nation. 

South  Carolina  v.  United  States,  p.  984. 

An  Act  of  Congress  imposing  a  duty  of  one  hundred  per  centum  of  a 
tax  as  a  penalty  for  a  false  return  is  constitutional. 
Doll  V.  Evans,  p.  879. 

Congress  has  power  to  tax  at  the  source  income  of  nonresident  aliens 
derived  from  sources  within  the  United  States. 

United  States  v.  Erie  Eailroad  Company,  p.  537. 

The  Federal  Government  has  the  power  to  tax  domestic  corporations 
upon  their  net  income  derived  from  selling  goods  in  foreign  states,  and 
such  tax  is  not  a  tax  on  exports. 

Peck  &  Co.  V.  Lowe,  p.  395. 

Taxation  of  the  Porto  Eican  income  of  a  New  York  corporation  does 
not  violate  the  Organic  Act  of  Porto  Eico  of  1917,  which  provides  that  all 
laws  shall  apply  to  Porto  Eico  except  internal  revenue  laws. 

Porto  Eico  Coal  Co.  v.  Edwards,  Collector,  p.  410. 

Congress  does  not  have  the  power  to  tax  the  salaries  of  federal  judges 
who  are  holding  office  when  the  act  is  passed. 

Chief  Justice  Taney  to  Mr.  Chase,  p.  138. 
Evans  v.  Gore,  p.  203. 

Congress  has  the  power  to  require  memoranda  of  sales  for  future  deliv- 
eries for  the  purpose  of  taxing  the  sales. 
Nicol  V.  Ames,  p.  371. 

Congress  cannot,  under  the  Constitution  of  the  United  States,  impose 
a  tax  upon  the  salary  of  an  officer  of  a  state. 
Collector  v.  Day,  p.  149. 
United  States  v.  Eitchie,  p.  569. 
Freedman  v.  Sigel,  Collector,  p.  225. 

An  excise  tax  by  the  United  States  upon  public  service  corporations  or- 
ganized for  carrying  on  business  of  a  private  character  is  not  invalid  on  the 
ground  that  it  taxes  a  function  of  a  state. 

Flint  V.  Stone-Tracy  Co.,  p.  217. 

If  a  particular  tax  bears  heavily  upon  a  corporation  or  a  class  of  corpo- 
rations, it  cannot,  merely  for  that  reason  only,  be  pronounced  contrary  to 
the  constitution  as  practically  destroying  the  right  of  states  to  create 
corporations. 

Flint  v.  Stone-Tracy  Co.,  p.  217. 

A  federal  estate  tax  is  not  unconstitutional  on  the  ground  that  it  is 
levied  on  rights  created  solely  by  state  law  and  depending  for  their  con- 
tinued existence  on  the  consent  of  the  several  states. 

Knowlton  v.  Moore,  p.  289, 

New  York  Trust  Co.  v.  Eisner,  p.  370. 


826  545  U.  S.  TAX  CASES 

(2)    State 

A  tax  levied  by  a  state  upon  the  corporate  franchise  or  business  of  a 
corporation,  and  computed  by  the  extent  of  the  dividends  upon  its  capital 
stock,  is  not  a  tax  upon  the  capital  stock  or  property  of  the  company  and  so 
no  reduction  need  be  made  because  of  the  fact  that  the  company  had  in- 
vested part  of  its  capital  in  United  States  bonds. 

Home  Insurance  Company  v.  New  York  State,  p.  909. 

A  state  tax  law  is  not  unconstitutional  because  the  tax  is  imposed  upon 
income  on  a  nonresident  which  is  derived  from  property  situated  within 
the  state. 

Shaffer  v.  Howard,  p.  444. 

Shaffer  v.  Carter,  p.  448. 

Travis,  Comptroller,  v.  Yale  &  Towne  Mfg.  Co.,  p.  505. 

A  state  may  validly  compel  non-residents  to  pay  an  income  tax  upon 
profit  from  business  done  in  the  state  no  greater  in  any  respect  than  the  tax 
imposed  upon  the  conduct  of  such  a  business  by  a  resident. 
People  ex.  rel.  Stafford  v.  Travis,  p.  960. 

A  state  may  not  legally  levy  a  tax  upon  income  received  by  a  person 
for  a  year  during  which  he  was  a  nonresident  of  that  state,  when  such  per- 
son becomes  a  resident  after  the  close  of  the  taxable  year. 
Hart  V.  Tax  Commissioner,  p.  903. 

A  state  cannot  tax  the  interest  on  bonds  made  and  payable  out  of  the 
state  and  issued  to  and  held  by  nonresidents  of  the  state. 
State  Tax  on  Foreign-Held  Bonds,  p.  487. 
Maguire  v.  Trefry,  p.  326. 

A  state  income  tax  act  providing  for  the  raising  of  money  to  give  to 
soldiers  who  served  in  the  army  of  the  United  States  does  not  interfere  with 
the  exercise  of  the  power  to  raise  and  support  an  army  by  the  United  States, 
and  is  for  a  public  purpose  of  the  state. 

State  ex  rel.  Atwood  v.  Johnson,  p.  467. 

(3)    Territorial 

A  territory  which  by  its  organic  act  has  the  power  to  legislate  upon  all 
rightful  subjects  of  legislation  may  pass  an  income  tax  law. 
Peacock  &  Co.  v.  Pratt,  p.  395. 

(B)    Bequirements  of  Income  Taxation 

(1)    Unifonnity 

(a)    As  Bequired  by  Federal  Constitution 

Uniformity  as  used  in  the  Constitution  of  the  United  States  means  geo- 
graphical uniformity  throughout  the  United  States. 
Flint  V.  Stone-Tracy  Co.,  p.  217. 
La  Belle  Iron  Works  v.  United  States,  p.  294. 
Knowlton  v.  Moore,  p.  289. 

A  graduated  income  tax  is  constitutional. 

Brushaber  v.  U.  P.  Railroad  Co.,  p.  107. 
Tyee  Eealty  Co.  v.  Anderson,  p.  513. 

A  tax  act  is  not  unconstitutional  because  of  inequality  of  operation 
owing  to  different  local  conditions. 

Flint  V.  Stone-Tracy  Co.,  p.  217. 


545  U.  S.  TAX  CASES  827 

The  clause  of  the  Constitution  of  the  United  States  requiring  taxes  to 
be  uniform  throughout  the  United  States  is  applicable  only  to  the  taxing 
power  of  the  United  States,  and  does  not  apply  to  the  taxing  power  of  a 
territory. 

Peacock  &  Co.  et  al.  v.  Pratt,  p.  395. 
Lawrence  v.  Wardell,  Collector,  p.  304. 
Provisions  of  an  income  tax  act  which  allow  different  deductions  for 
married  people  than  for  single,  different  deductions  for  husbands  than  for 
wives,  and   different   deductions   for  individuals   or  partnerships  than   for 
corporations  is  not  discriminatory. 

Brushaber  v.  U.  P.  Eailroad  Co.,  p.  107. 
Stanton  v.  Baltic  Mining  Co.,  p.  460. 
Flint  V.  Stone-Tracy  Co.,  p.  217. 
An  act  taxing  the  use  of  foreign  built  yachts  without  also  taxing  the 
use  of  domestic  yachts  is  not  unconstitutional  because  of  lack  of  uniformity. 
Billings  V.  United  States,  p.  92. 
Stamp  tax  on  sales  for  future  delivery  is  uniform  in  that  it  is  upon  all 
who  avail  themselves  of  the  privileges  or  facilities  offered  at  the  exchanges. 
Nicol  V.  Ames,  p.  371. 

(b)    As  Required  in  Various  States 
Where  a  state  constitution  has  provided  that  taxes  shall  be  uniform,  the 
only  uniformity  required  is  uniformity  within  the  class. 
State  ex  rel.  Atwood  v.  Johnson,  p.  467. 
Ludlow-Saylor  Wire  Co.  v.  Wollbrinck,  p.  317. 
State  v.  Pinder,  p.  475. 
Eobertson  v.  Pratt,  p.  434. 
In  re  Opinion  of  the  Justices,  p.  382. 
An  income  tax,  being  an  excise,  is  not  invalid  as  being  in  conflict  with 
the  provision  of  a  state  constitution  that  property  shall  be  taxed  in  pro- 
portion to  its  value  and  shall  be  assessed  for  taxes  under  general  rules  and 
by  uniform  rules  according  to  its  true  value. 

Hattiesburg  Grocery  Co.  v.  Eobertson,  p.  904. 

An  income  tax  is  not  unconstitutional  because  it  is  graduated. 
Wells  ads.  Alderman,  p.  599. 

A  state  income  tax  act  is  not  unconstitutional  because  it  taxes  corpora- 
tions differently  than  individuals,  or  a  certain  class  of  individuals  differently 
than  another  class. 

Ludlow-Saylor  Wire  Co.  v.  Wollbrinck,  p.  317. 
Glasgow  V.  Eowse,  p.  230. 
A  state  tax  law  is  not  invalid  which  taxes  the  stock  of  foreign  corpora- 
tions and  does  not  tax  the  stock  of  domestic  corporations. 
Kidd  V.  Alabama,  p.  283. 
Darnell  v.  Indiana,  p.  166. 
A  tax  on  dividends  declared  by  a  corporation  to  its  stockholders  is  not 
invalid  as  lacking  uniformity,  since  all  dividends  of  all  stockholders  are 
reached. 

State  ex  rel.  Pfister  v.  Widule,  p.  481. 
A  state  statute  providing  that  certain  forms  of  property  shall  be  as- 
sessed upon  their  market  value  and  other  forms  of  property  upon  a  certain 
number  of  times  their  annual  value  is  not  valid  under  a  state  constitution 
empowering  the  general  assembly  to  levy  proportional  taxes  upon  all 
inihabitants. 

In  re  Opinion  of  Justices,  p.  383. 


828  545  U.  S.  TAX  CASES 

A  tax  upon  income  derived  by  the  inhabitants  of  a  state  from  the  stocks, 
bonds  and  mortgages  issued  by  foreign  corporations  is  a  tax  upon  property 
and  is  invalid,  under  a  state  constitution  requiring  taxes  on  property  to  be 
levied  proportionally  upon  all  inhabitants,  if  it  is  not  levied  at  the  same 
rate  as  taxes  on  other  property. 

In  re  Opinion  of  Justices,  p.  383. 

To  use  the  gross  income  of  corporations  as  a  basis  for  taxation  of  prop- 
erty while  the  amount  of  property  was  used  as  the  basis  for  individuals  is 
in  violation  of  the  constitution  of  a  state  requiring  property  of  corporations 
to  be  taxed  as  nearly  as  may  be  as  property  of  individuals. 
Johnson  v.  Wells  Fargo  &  Co.,  p.  279. 

A  city  ordinance  that  taxes  real  estate  and  interest  on  bonds,  notes,  and 
other  evidences  of  indebtedness,  at  a  different  rate  than  the  gross  earnings 
of  banks  is  not  void  under  the  constitution  of  a  state  which  declares  that 
taxes  shall  be  uniform  on  all  species  of  property  taxed. 
Waring  v.  Savannah,  p.  594. 

(2)    Validity  of  Exemptions 

Specific  exemptions  of  certain  amounts  are  not  repugnant  to  the  due 
process  clause  of  the  Fifth  Amendment. 

Brushaber  v.  U.  P.  Eailroad  Co.,  p.  107. 

It  is  within  the  power  of  the  legislature  to  make  a  reasonable  classifica- 
tion, and  the  failure  to  tax  all  incomes  is  not  a  constitutional  objection. 
In  re  Opinion  of  the  Justices,  p.  383. 
State  V.  Finder,  p.  475. 

Personal  exemptions  from  taxation  are  valid  as  long  as  they  are  reason- 
able, and  the  amount  is  largely  within  the  discretion  of  the  legislature. 
Peacock  &  Co.  et  al.  v.  Pratt,  p.  395. 
State  V.  Finder,  p.  475. 
Eobertson  v.  Pratt,  p.  434. 
Even  if  there  is  a  right  to  exempt  a  certain  class  of  property  wholly 
from  taxation,  a  partial  exemption,  conditional  upon  the  property  exempted 
contributing  an  arbitrary  and  disproportional  percentage  of  its  value,  is 
not  authorized. 

In  re  Opinion  of  Justices,  p.  383. 
A  provision  permitting  farmers  to  omit  from  their  income  return  certain 
products  of  the  farm  which  are  used  by  them  is  valid. 
Brushaber  v.  U.  P.  Eailroad  Co.,  p.  107. 
Eobertson  v.  Pratt,  p.  434. 
A  state  income  tax  act  is  not  a  violation  of  the  provisions  of  a  state 
constitution  because  it  exempts  income  derived  from  sources  other  than  the 
classes  of  property  permitted  to  be  exempt  by  the  constitution. 
Ludlow-Saylor  Wire  Co.  v.  Wollbrinck,  p.  317. 
A  law  is  invalid,  because  violating  a  contract  of  the  Government,  which 
imposes  a  tax  upon  the  income  derived  from  property  which  by  contract 
of  the  Government  is  exempt. 

Oahu  E.  &  L.  Co.  v.  Pratt,  p.  380. 
A  territorial  income  tax  law  which  allows  an  exemption  of  two  thousand 
dollars  upon  incomes  under  four  thousand   dollars  violates  the  territorial 
constitution  requiring  each  person  to  contribute  his  proportion  to  the  ex- 
pense of  protecting  his  life,  liberty  and  property. 
Campbell  v.  Shaw,  p.  122. 


545  U.  S.  TAX  CASES  .829 

A  city  ordinance  which  exempts  certain  classes  of  property  from  taxa- 
tion is  not  void  under  the  constitution  of  a  state  which  declares  that  taxes 
shall  be  uniform  on  all  species  of  property  taxed. 
Waring  v.  Savannah,  p.  594. 

(3)    Discrimination 

A  state  income  tax  law  is  unconstitutional  which  grants  certain  exemp- 
tions to  residents  without  providing  for  similar  exemptions  to  nonresidents 
where  there  is  no  adequate  ground  for  the  discrimination. 

Travis,  Comptroller  v.  Yale  &  Towne  Mfg.  Co.,  p.  505. 

A  discrimination  against  nonresidents  cannot  be  deemed  to  be  counter- 
balanced by  a  provision  in  their  favor,  not  so  conditioned,  however,  as  prob- 
ably to  benefit  them  to  a  degree  corresponding  to  the  discrimination  against 
them. 

Travis,  Comptroller  v.  Yale  &  Towne  Mfg.  Co.,  p.  505. 

It  is  not  an  unlawful  discrimination  not  to  compel  taxpayers  owning 
their  own  residences  to  include  in  their  gross  income  the  estimated  rental 
value  thereof,  while  not  allowing  taxpayers  who  rent  residences  to  deduct 
the  rent  paid. 

Brushaber  v.  U,  P.  Eailroad  Co.,  p.  107. 

A  provision  that  the  income  of  a  wife  living  with  a  husband  be  added 
to  that  of  the  husband  is  not  discriminatory. 

State  ex  rel.  Bolens  v.  Frear  et  al.,  p.  464. 

It  is  not  an  unlawful  discrimination  to  provide  a  different  rate  of  taxa- 
tion for  corporations  than  for  individuals,  or  for  one  class  of  individuals  or 
corporations  than  for  another. 

State  ex  rel.  Bolens  v.  Frear  et  al.,  p.  464. 

Eobertson  v.  Pratt,  p.  434. 

Malley,  Collector,  v.  Bowditch  et  al.,  p.  327. 

Allowing  one  who  has  paid  a  property  tax  to  have  the  amount  credited 
upon  his  income  tax  is  not  discriminatory. 

State  ex  rel.  Bolens  v.  Frear  et  al.,  p.  464. 

A  state  income  tax  act  is  not  unconstitutional  because  it  provides  for 
withholding  the  tax  at  the  source  only  in  the  case  of  nonresidents. 
Travis,  Comptroller  v.  Yale  &  Towne  Mfg.  Co.,  p.  505. 

There  is  no  constitutional  discrimination  against  citizens  of  other  states 
in  confining  the  deduction  of  expenses  and  losses  in  the  case  of  nonresident 
taxpayers  to  such  as  are  connected  with  income  arising  from  sources  within 
the  state. 

Travis,  Comptroller  v.  Yale  &  Towne  Mfg.  Co.,  p.  505. 

Shaffer  v.  Carter,  p.  448. 

Equitable  Life  Assurance  Society  v.  Hart,  p.  201. 

A  state  income  tax  law  is  unconstitutional  which  taxes  the  income  of 
domestic  corporations  derived  from  sources  within  the  state,  while  entirely 
exempting  domestic  corporations  receiving  no  income  from  within  the  state. 
Eoster  Guano  Co.  v.  Virginia,  p.  437. 


830  545  U.  S.  TAX  CASES 

A  provision  in  an  excise  or  income  tax  act  restricting  deductions  for 
interest  payments  by  corporations  to  an  amount  not  to  exceed  a  certain 
proportion  of  the  paid  up  capital  stock  of  the  corporation  or  company  is  not 
discriminatory. 

Flint  V.  Stone-Tracy  Co.,  p.  217. 

Brushaber  v.  U.  P.  Eailroad  Co.,  p.  107. 

New  York,  N.  H.  &  H.  E.  E.  Co.  v.  United  States,  p.  365. 

Anderson,  Collector  v.  Forty-Two  Broadway  Co.,  p.  74. 

(4)  Double  Taxation 

Tax  on  dividends  is  not  unconstitutional  because  the  corporation  is  also 
taxed  on  its  property  and  franchises. 

Wells  ads.  Alderman,  p.  599. 

In  re  Opinion  of  the  Justices,  p.  382. 

To  tax  the  income  of  a  person  who  was  required  to  pay  a  license  tax  is 
not  double  taxation. 

Commonwealth  v.  Werth,  p.  158. 

It  is  not  double  taxation  to  require  an  insurance  company  to  pay  a 
license  fee  for  the  privilege  of  carrying  on  an  insurance  business  and  also 
a  license  fee  for  doing  business  as  a  corporation. 

Equitable  Life  Assurance  Society  v.  Hart,  p.  201. 

A  tax  on  income  is  not  invalid  because  the  taxpayer  has  paid  a  tax 
on  the  property  in  which  he  has  invested  the  income. 
Lott  V.  Hubbard,  p.  316. 

The  assessment  of  an  income  tax  on  the  commissions  received  by  an 
agent  of  an  insurance  company  is  not  invalid  even  though  the  insurance 
company  pays  an  excise  tax  measured  by  its  gross  profits. 
In  re  C.  Brewer  &  Co.,  Ltd.,  p.  106. 

There  is  no  constitutional  illegality  in  taxing  a  domestic  corporation 
doing  business  in  and  deriving  all  its  income  from  Porto  Eico  on  its  income 
as  though  it  were  derived  from  the  continental  United  States,  and  also  tax- 
ing it  in  Porto  Eico. 

Porto  Eico  Coal  Co.  v.  Edwards,  Collector,  p.  410. 

(5)  Direct  Taxation 

The  lack  of  power  to  levy  any  but  an  apportioned  tax  on  real  and  per- 
sonal property  equally  existed  as  to  the  revenue  therefrom  before  the  Six- 
teenth Amendment,  as  a  tax  upon  the  income  of  property  is  in  reality  a  tax 
upon  the  property  itself. 

Pollock  V.  Farmers'  Loan  &  Trust  Co.,  p.  408. 

The  purpose  of  the  Sixteenth  Amendment  was  to  do  away  with  the  rule 
existing  at  that  time  (Pollock  v.  Farmers'  Loan  &  Trust  Co.)  of  determining 
whether  a  tax  on  income  was  direct,  not  by  a  consideration  of  the  burden 
placed  on  the  taxed  income  upon  which  it  directly  operated,  but  by  taking 
into  view  the  burden  which  resulted  on  the  property  from  which  the  income 
was  derived. 

Brushaber  v.  U.  P.  Eailroad  Co.,  p.  107. 

Evans  v.  Gore,  p.  203. 

Tyee  Eealty  Co.  v.  Anderson,  p.  513. 

Stanton  v.  Baltic  Mining  Co.,  p.  4G0. 


545  U.  S.  TAX  CASES  831 

The  Revenue  Act  of  1916,  insofar  as  it  imposes  a  tax  upon  a  stockholder 
because  of  his  having  received  a  stock  dividend,  this  being  not  a  tax  upon 
income,  is  unconstitutional  as  a  direct  tax  without  apportionment. 

Eisner,  Collector,  v.  Macomber,  p.  196. 

Towne  v.  Eisner,  p.  500. 

A  tax  upon  the  business  of  an  insurance  company  is  not  a  direct  tax. 
Pacific  Insurance  Co.  v.  Soule,  p.  391. 

A  tax  upon  the  gross  earnings  of  a  bank  is  a  franchise  tax  and  not  a  tax 
upon  property  because  the  amount  of  the  tax  fluctuates  with  the  quantity  of 
business  transacted  and  is  measured  by  it. 

Security  Savings  &  Commercial  Bank  v.  District  of  Columbia, 
p.  975. 

The  measure  of  an  excise  tax  on  a  privilege  may  be  the  income  from  all 
property  even  though  part  of  it  may  be  from  tax  exempt  property. 
Flint  v.  Stone-Tracy  Co.,  p.  217. 

A  stamp  tax  act  requiring  stamps  to  be  affixed  to  memoranda  of  sales 
is  in  effect  a  duty  or  excise  tax  and  not  a  direct  tax. 
Nicol  V.  Ames,  p.  371. 

An  estate  tax  is  not  a  direct  tax. 
Knowlton  v.  Moore,  p.  289. 

McElligott  V.  Kissam  et  al.,  p.  340;  same  case  on  appeal,  p.  915. 
New  York  Trust  Co.  v.  Eisner,  p.  370. 

Income  is  not  property,  and  a  tax  on  income  is  not  a  direct  tax  on 
property. 

(Ga.)  Waring  v.  Savannah,  p.  594. 

(Ga.)  Mayor,  etc.,  Savannah  v.  Hartridge,  p.  336. 

(Mo.)  Ludlow-Saylor  Wire  Co.  v.  Wollbrinck,  p.  317. 

A  tax  on  income  is  in  the  last  analysis  simply  a  portion  cut  from  the 
income  and  appropriated  by  the  state  as  a  share  thereof,  and,  while  it  in- 
cludes some  of  the  elements  both  of  a  tax  on  property  and  of  a  tax  on  per- 
sons, it  cannot  be  strictly  classified  as  a  tax  on  either,  for  it  is  generally 
and  necessarily  an  excise. 

Hattiesburg  Grocery  Co.  v.  Robertson,  p.  904. 

A  state  law  levying  a  tax  on  incomes  of  2  to  4  per  cent  constitutes  a 
violation  of  a  constitutional  provision  to  the  effect  that  the  legislature  shall 
not  have  power  to  levy  a  greater  rate  of  taxation  than  65/100  of  1  per  cent 
on  the  value  of  taxable  property,  since  incomes  are  property  within  both  the 
ordinary  legal  and  the  constitutional  meaning  of  that  word. 
Eliasberg  Bros.  Mercantile  Co.  v.  Grimes,  p.  886. 

(6)    Retroactive  Operation  of  Tax  Law 

The  fact  that  a  tax  statute  operates  retroactively  does  not  necessarily 
cause  the  act  to  be  beyond  the  power  of  Congress. 

Brushaber  v,  U.  P.  Railroad  Co.,  p.  107. 
Billings  V.  United  States,  p.  92. 
Overland  Sioux  City  Co.,  Inc.,  v.  Clemens,  p.  387. 
United  States  v.  McHatton  et  al.,  p.  550. 
Tyee  Realty  Co.  v.  Anderson,  p.  513. 

A  tax  act  which  has  expired  may  be  revived  and  continued  in  existence 
for  a  longer  period. 

Stockdale  v.  Atlantic  Ins.  Co.,  p.  490. 


832  545  U.  S.  TAX  CASES 

An  income  tax  act,  which  imposes  a  tax  upon  the  net  income  for  the 
year,  including  a  portion  of  net  income  which  was  received  prior  to  the 
going  into  effect  of  the  act,  is  not  therefore  invalid. 

Overland  Sioux  City  Co.,  Inc.  v.  Clemens,  p.  387. 

Tyee  Eealty  Co.  v.  Anderson,  p.  513. 

Schuylkill  Navigation  Co.  v.  Elliott,  Collector,  p.  445. 

Faulkner  et  al.,  v.  Trefry,  p.  206. 

An  estate  tax  act  is  not  unconstitutional  because  it  includes  transfers 
of  property,  made  prior  to  its  passage,  to  take  effect  in  possession  or  enjoy- 
ment at  or  after  the  death  of  the  grantor. 

Union  Trust  Co.  v,  Wardell,  p.  517. 

An  act  prescribing  additional  procedure  for  the  recovery  by  the  tax- 
payer of  illegally  assessed  taxes,  does  not  apply  to  taxes  imposed  before  the 
passage  of  the  act,  as  the  right  to  such  recovery  had  vested. 
Hubbard  v.  Brainard,  p.  266. 

A  state  income  tax  act  which  imposes  a  tax  upon  a  portion  of  the  net 
income  which  was  received  prior  to  the  going  into  effect  of  the  act  is  a 
violation  of  the  state  constitution  which  provides  that  no  law,  retrospective 
in  its  operation,  can  be  passed  by  the  general  assembly. 
Smith  v.  Dirckx,  p.  455. 

(7)    Due  Process 

An  income  tax  act  which  provides  for  notice  to  taxpayer,  a  hearing, 
and  a  suit  to  recover,  is  not  unconstitutional  as  lacking  due  process. 
Wells  ads.  Alderman,  p.  599. 
Kausch  V.  Moore,  p.  280. 

An  act  providing  for  the  collection  of  the  tax  at  the  source  is  not  repug- 
nant to  due  process  of  law,  as  a  taking  of  the  property  of  corporations 
without  compensation,  because  of  the  cost  of  collection  to  which  they  are 
subject. 

Brushaber  v.  U.  P.  Kailroad  Co.,  p.  107. 

Tyee  Eealty  Co.  v.  Anderson,  p.  513. 

An  income  tax  act  allowing  individuals  to  deduct  from  their  gross 
income  dividends  paid  them  by  corporations  whose  incomes  are  taxed,  and 
not  giving  such  rights  of  deduction  to  corporations,  is  valid. 

Brushaber  v.  U.  P.  Eailroad  Co.,  p.  107. 

Stanton  v.  Baltic  Mining  Co.,  p.  460. 

The  taxation  of  the  use  of  foreign  built  yachts  without  also  taxing  tne 
use  of  domestic  yachts  is  not  a  denial  of  due  process. 
Billings  V.  United  States,  p.  92. 

Determination  of  invested  capital  under  Eevenue  Act  of  1917,  not 
upon  value,  but  upon  cost  of  assets,  disregarding  the  time  of  acquisition, 
thus  preventing  inclusion  of  appreciation,  is  not  so  arbitrary  as  to  amount 
in  effect  to  confiscation,  under  Fifth  Amendment  of  the  Constitution  of  the 
United  States,  and  thus  to  render  the  act  unconstitutional  as  a  deprivation 
of  property  without  due  process. 

La  Belle  Iron  Works  v.  United  States,  p.  294. 

A  tax  of  seventy -two  per  cent  upon  a  person  'a  income  is  not  confiscatory 
merely  because  of  the  high  rate. 

Towne  v.  McElligott,  Collector,  p.  501. 


545  U.  S.  TAX  CASES  833 

(8)    Searches  and  Seizures 

Even  if  the  search  and  seizure  provided  for  in  an  act  is  unconstitutional 
it  does  not  mean  that  the  whole  act  is  unconstitutional. 
Peacock  &  Co.  et  al.  v.  Pratt,  p.  395. 

The  Fourteenth  Amendment  protecting  against  unreasonable  seizure 
and  searches  is  not  violated  by  a  law  which  requires  returns  to  be  filed  in 
the  office  of  the  Commissioner  of  Internal  Eevenue  and  to  constitute  public 
records  open  to  inspection. 

Flint  v.  Stone-Tracy  Co.,  p.  217. 

A  provision  authorizing  Internal  Eevenue  Agents  to  examine  private 
books  and  papers  is  not  unconstitutional. 
Perry  v.  Newsome,  p.  402. 

A  statutory  provision  that,  in  all  suits  other  than  criminal,  the  attorney 
representing  the  Government  might  make  a  written  notice  for  the  production 
of  any  books,  papers,  etc.,  which  might  tend  to  prove  any  allegation  made  by 
the  United  States,  and  that  if,  upon  notice  from  the  court,  such  books, 
papers,  etc.,  were  not  produced,  the  allegations  stated  were  to  be  taken  as 
confessed,  is  unconstitutional  as  applied  to  actions  for  alleged  fraud  under 
the  revenue  laws,  because  in  effect  compelling  the  dependant  to  testify 
against  himself  and  therefore  repugnant  to  the  Fourth  and  Fifth  Amend- 
ments of  the  federal  constitution. 

Boyd  V.  United  States,  p.  104. 

(9)    Law  Impairing  Contract  Obligations 

A  provision  in  a  state  act  allowing  a  trustee  to  reimburse  himself  by 
deducting  the  amount  of  the  income  tax  paid  by  him  from  the  amount  to  be 
paid  the  beneficiary  is  not  invalid  as  impairing  a  contract  obligation  to  pay 
the  net  income  to  the  beneficiary. 

State  ex  rel.  Wisconsin  Trust  Co.  v.  Widule,  p.  483. 

(10)    State  Taxation  Affecting  Interstate  Commerce 

A  state  income  tax  act  is  not  unconstitutional  merely  because  it  affects 
transactions  involving  interstate  commerce,  unless  it  places  a  burden  thereon. 
United  States  Glue  Co.  v.  Town  of  Oak  Creek,  p.  581. 

Interstate  commerce  comes  to  an  end  when  goods  bought  outside  the 
state  are  delivered  to  a  factory  and  made  a  part  of  a  common  stock  of  mer- 
chandise within  the  state,  and  a  tax  on  the  sale  of  such  goods  within  the 
state  is  not  a  burden  on  interstate  commerce,  even  though  the  goods  have 
undergone  only  a  slight  change  in  form  at  the  factory. 
Hood  &  Sons  v.  Commonwealth,  p.  264. 

A  state  income  tax  upon  a  corporation  engaged  in  unloading  railroad 
cars,  carrying  ore  consigned  to  Eastern  points,  and  in  loading  the  same  om 
vessels,  is  not  a  burden  upon  interstate  commerce. 

City  of  Superior  v.  Allouez  Bay  Dock  Co.,  p.  142. 


SUPPLEMENT 

TO 

645  UNITED  STATES  TAX  CASES 

ALWORTH-STEPHENS  CO.  v.  LYNCH 
(U.  S.  District  Court,  D.  Minn.,  Fifth  Division,  March  30,  1922) 

(278  Fed.  959) 

Record:  Revenue  Act  of  1917.  Action  to  recover  tax  paid 
under  protest  against  E.  J.  Lynch,  as  Collector  of  Internal  Reve- 
nue, in  which  Margaret  C.  Lynch,  as  executrix,  was  substituted  as 
defendant,  after  the  death  of  the  original  defendant.  Judgment 
ordered  for  plaintiff. 

Facts :  The  plaintiff  company  was  incorporated  in  1907,  with 
an  authorized  capital  of  $100,000,  which  was  subscribed  for  by  live 
persons,  the  subscriptions  to  be  paid  in  cash  at  par  as  called  for. 
During  1907  and  1908  five  calls,  of  $5,000  each,  were  made  and 
paid,  making  a  fully  paid-in  capital  of  $25,000,  and  no  further 
calls  were  ever  made,  and  $24,000  only  of  stock  was  issued.  After 
the  year  1908  the  plaintiff  distributed  to  its  stockholders  as  divi- 
dends all  sums  which  it  received,  and  before  the  end  of  the  year 
1909  had  paid  to  the  stockholders  as  dividends  sums  in  excess  of 
all  amounts  paid  in  by  them  for  stock. 

Upon  the  organization  of  the  company  in  1907  an  exploratory 
option  contract  covering  some  5,000  acres  of  land  was  assigned  to 
the  plaintiff.  In  1908,  the  plaintiff  discovered  a  body  of  iron  ore 
on  part  of  the  property  known  as  the  Perkins  property  and  took 
out  a  mining  lease  upon  this  property,  pursuant  to  the  terms  of 
the  option  contract,  which  provided  for  a  payment  of  a  royalty 
of  30c  per  ton.  In  the  same  year  the  plaintiff  subleased  this  prop- 
erty by  lease  which  provided  for  payment  to  it  of  75c  per  ton. 
Also  in  1908,  the  plaintiff  granted  to  an  individual  an  option  to 
explore  and  take  out  a  mining  lease  on  part  of  the  land  known  as 
the  Hudson  property.  This  option  was  later  assigned  to  a  mining 
company  which  discovered  a  body  of  ore  thereon,  and  thereupon, 
the  plaintiff  took  out  a  lease  upon  the  same,  pursuant  to  the  terms 
of  its  option  contract,  which  provided  for  payment  of  royalties  to 
the  owners  of  30c  per  ton.  The  plaintiff  then  subleased  the  prop- 
erty to  the  mining  company  at  a  royalty  of  60c  a  ton.  The  income 
of  the  plaintiff  consisted  of  the  royalties  paid  to  it  by  the  sublessees. 

On  March  1,  1913,  both  the  Perkins  and  Hudson  Mines  had 
been  thoroughly  explored  and  the  ore  in  each  was  developed  and 

835 


836  545  U.  S.  TAX  CASES 

the  amount  in  tonnage  definitely  known.  It  was  also  known  that 
the  ore  would  be  completely  mined  out  and  exhausted  within  a 
period  of  seven  years  from  that  date  and  that  it  would  be  mined 
and  removed  and  paid  for  under  the  subleases  at  least  as  fast  as 
in  equal  installments  during  this  period.  The  plaintiff  was  forced 
to  pay  to  the  Government  the  amount  of  an  additional  assessment 
of  tax  for  1917  which  was  assessed  because  of  the  disallowance  of 
the  depletion  deduction  taken  by  the  plaintiff  in  its  return. 

Questions:  (1)  Was  the  plaintiff  entitled  to  deduct,  in  fig- 
uring its  income  and  excess  profits  tax  for  the  year  1917,  from  the 
royalties  received  by  it  an  allowance  for  depletion  based  on  market 
value  of  plaintiff's  interest  in  certain  mines  on  March  1,  1913? 

(2)  Was  the  plaintiff  entitled  to  assessment  under  either  Sec- 
tion 209  or  210  of  the  Revenue  Act  of  1917,  the  former  applying  to 
a  business  having  no  invested  capital  or  not  more  than  a  nominal 
capital  and  the  latter  to  cases  in  which  the  invested  capital  cannot 
satisfactorily  be  determined? 

Decision:  (1)  The  court  made  the  following  among  other 
findings  of  fact:  That  the  fair  market  value  on  March  1,  1913, 
of  the  plaintiff's  property  interest  in  the  ore  in  the  Perkins  mine 
was  not  less  than  32.355c  per  ton  and  of  the  plaintiff's  property 
interest  in  the  ore  in  the  Hudson  mine  was  not  less  than  21.57c 
per  ton.  This  market  value  was  ascertained  by  multiplying  the 
total  number  of  tons  in  the  Perkins  mine  by  the  net  royalty  of 
45c  per  ton  and  the  total  number  of  tons  in  the  Hudson  mine  by 
the  net  royalty  of  30c  per  ton,  considering  the  royalties  as  pay- 
able in  equal  annual  installments  for  seven  years  from  March  1, 
1913,  reducing  the  total  amount  so  to  be  received  to  the  present 
worth  as  of  March  1,  1913,  on  a  9%  discount  basis,  and  then  divid- 
ing said  total  March  1,  1913,  value  by  the  number  of  tons  therein. 
From  this  it  follows  that  the  March  1,  1913,  value  of  each  dollar 
which  the  plaintiff  would  receive  during  the  life  of  the  mines  for 
its  net  property  interest  was  71.9c,  or  that  the  value  of  the  plain- 
tiff's interest  was  71.9%  of  the  total  net  royalties  which  it  would 
receive.  The  court  then  concluded  that  for  the  year  1917,  the 
reasonable  allowance  for  depletion  to  which  the  plaintiff  was  en- 
titled as  to  each  of  these  mines  was  71.9c  for  each  dollar  of  net 


545  U.  S.  TAX  CASES  837 

royalties  which  it  received  for  said  year.  A  risk  rate  of  10%  on  the 
Perkins  mine  and  8%  on  the  Hudson  mine,  or  an  average  of  9%, 
instead  of  a  6%  basis,  as  contended  for  by  the  plaintiff,  was  ap- 
proved. The  court  stated  its  reasons  for  allowing  the  deduction  in 
the  following  language : 

"I  do  not  think  that  there  can  be  any  question  but  that  on 
the  1st  of  March,  1913,  the  plaintiff  owned  a  valuable  property 
interest  or  right  in  both  of  these  mines,  and  that  the  value  of  the 
property  interest  or  right  was  approximately  capable  of  definite 
ascertainment  and  should  be  determined  on  the  basis  above  indi- 
cated. The  plaintiff  on  the  1st  of  March,  1913,  owned  this  prop- 
erty interest  or  right  and  has  ever  since  owned  it.  It  could  have 
sold  it  on  that  day  for  an  amount  calculated  on  the  above  indi- 
cated basis,  and  surely  until  the  part  of  that  amount  represented 
by  the  ore  taken  out  is  deducted,  there  could  be  no  net  income  or 
profit  on  such  ore  taken  out.  This  allowance  or  deduction  for  de- 
pletion would  not  be  a  deduction  for  depletion  as  against  the  owner. 
Under  the  evidence  in  this  case,  both  the  fee  owner  and  the  plaintiff 
would  be  entitled  to  such  deduction,  and  both  could  get  such  deduc- 
tion in  full  as  to  the  ore  taken  out,  without  exceeding  the  market 
value  of  such  ore  in  the  mine  as  of  the  1st  of  March,  1913." 

(2)  "I  am  also  of  the  opinion  that  the  invested  capital  of  the 
company  was,  in  1917,  $25,000,  and  that  the  invested  capital  could 
not  be  said  to  be  not  more  than  a  nominal  capital,  and  that  there- 
fore the  levy  and  assessment  could  not  be  made  under  either  Sec- 
tions 209  or  210  of  the  Act  (Comp.  St.  §§  63363^J,  6336%K),  but 
must  be  made  under  Section  210  (section  6336%B)." 

IN  RE  ANDERSON 

(U.  S.  District  Court,  S.  D.  New  York,  June  23,  1921) 
(275  Fed.  397) 

Record:  Section  64a  of  Bankruptcy  Act.  On  petition  of 
William  H.  Edwards,  Collector  of  Internal  Revenue,  to  review 
decision  of  referee.    Affirmed. 

Facts:  The  bankrupt's  income  tax  had  been  levied  on  a  re- 
turn made  by  her  in  1918.     The  adjudication   (voluntary)    was 


838  545  U.  S.  TAX  CASES 

made  on  October  17,  1918,  and  the  United  States  never  filed  any- 
proof  of  claim.  On  January  7,  1921,  more  than  two  years  after 
adjudication,  the  trustee  served  notice  upon  the  local  collector  of 
internal  revenue  of  a  motion  to  bar  the  United  States  because 
the  tax  asserted  to  be  due  was  not  so  in  fact.  The  United  States 
attorney  appeared  specially  to  object  to  jurisdiction,  but  the  ref- 
eree overruled  his  objection,  proceeded  to  liquidate  the  claim  and 
after  taking  evidence  held  that  the  bankrupt  had  been  improperly 
taxed.  Thereupon  he  passed  an  order  so  declaring  and  foreclosing 
the  United  States  from  setting  up  the  claim  thereafter. 

Questions:  (1)  Did  the  court  have  jurisdiction  to  proceed, 
without  the  filing  of  a  claim  by  the  United  States,  to  liquidate  the 
tax  in  question? 

(2)  Was  notice  to  the  Collector  of  Internal  Revenue  for  the 
district  sufficient  as  a  condition  precedent  to  such  proceedings? 

Decision:  (1)  "Under  the  present  Act,  it  has,  however,  been 
several  times  held  that  the  bankruptcy  court  had  jurisdiction 
directly  to  reassess  or  liquidate  a  tax,  regardless  of  its  conclusive- 
ness under  the  domestic  law  or  of  the  procedure  established  to 
review  it.  *  *  *  In .  all  these  cases  the  point  came  up  upon 
claim  filed  by  the  taxing  power,  and  therefore  this  question  of 
jurisdiction  did  not  arise ;  still  the  power  of  the  bankruptcy  court 
over  the  subject  matter  is  settled.  The  case  turns  upon  the  impli- 
cations necessarily  to  be  drawn  from  Section  64a  of  the  present 
Act.  *  *  *  The  section  shows  that  taxes  are  treated  as  quite 
different  from  dividends,  as  paj'^ments  to  be  made  before  the  dis- 
tribution proper  of  the  estate  takes  place.  •  •  •  The  section 
contemplates  that  the  taxes  shall  be  liquidated  and  paid  at  once, 
a  purpose  which  cannot  be  accomplished  if  the  estate  must  wait 
some  action  by  the  taxing  power.  If  the  court  has  no  power  con- 
clusively to  decide  the  issues,  it  is  obliged  to  hold  up  the  adminis- 
tration until  such  time  as  the  United  States  or  a  state  may  choose 
to  proceed.  It  appears  to  me  to  be  a  necessary  implication  of  the 
statute  that  some  action  may  be  taken  in  invitum.  *  •  •  Even 
assuming  that  jurisdiction  must  go  as  far  as  though  the  United 
States  had  a  specific  lien  upon  the  propertj'',  still  I  think  it  an 
implication  from  the  section  that  Congress  meant  to  permit  the 


545  U.  S.  TAX  CASES  839 

United  States  to  be  drawn  into  the  proceedings  so  far  as  necessary. 
Therefore  I  agree  with  the  learned  referee  in  believing  that  he 
had  power  to  make  a  ruling  which  would  protect  the  trustee  in 
distribution,  and  the  only  remaining  question  is  of  the  actual  pro- 
cedure which  he  adopted." 

(2)  "Notice  was  probably  necessary,  and  at  least  a  proper 
condition  precedent  to  any  action,  and  the  normal  person  on  whom 
to  serve  notice  was  the  official  charged  with  the  duty  of  collecting 
taxes,  he  who  would  file  the  claim  if  one  was  filed.  *  *  •  There 
is  at  least  no  other  conceivable  official  on  whom  notice  could  be 
served  if  he  be  not  the  man,  and,  if  Section  64a  gives  the  court 
power  on  its  own  initiative  to  move  at  all,  the  procedure  here 
adopted  was  the  only  one  open. ' ' 

IN  RE  ASSOCIATED  TRUST 

(U.  S.  District  Court,  D.  Mass.  Oct.  8,  1914) 
(222  Fed.  1012) 

Record:  In  Bankruptcy.  On  motion  to  dismiss  petition. 
Motion  denied. 

Facts:  An  involuntary  petition  was  filed  in  bankruptcy 
against  * '  The  Associated  Trust, ' '  a  Massachusetts  real  estate  trust. 
Adjudication  was  sought  upon  the  ground  that  the  respondent  was 
an  "unincorporated  company"  within  the  meaning  of  the  Act. 
The  declaration  of  trust  under  which  the  respondent  was  organized, 
provided  among  other  things  that,  if  the  trustee  should  resign,  the 
certificate  holders  might  elect  a  new  trustee ;  that  vacancies  in  the 
trusteeship  might  be  filled  by  the  certificate  holders  at  meetings 
duly  called;  that  special  meetings  might  be  called  by  the  trustee, 
and  should  be  called  upon  request  of  a  prescribed  number  of  cer- 
tificate holders ;  and  that  the  certificate  holders  could  terminate  the 
trust,  increase  the  number  of  shares,  and  amend  the  declaration  of 
trust,  by  a  three-quarters  vote. 

Questions :  ( 1 )  What  is  the  meaning  of  the  word  '  *  company ' ' 
as  used  in  the  Bankruptcy  Act  ? 

(2)  Is  the  respondent  an  "unincorporated  company"  within 
the  meaning  of  the  Act? 


840  545  U.  S.  TAX  CASES 

Decision:  (1)  "It  would  seem  to  imply  an  association  of  in- 
dividuals not  partners,  carrying  on  business  under  a  distinct  name, 
and  having  common  rights  inter  se,  but  having  no  individual  own- 
ership in  the  joint  property,  no  individual  control  over  the  business 
in  which  their  joint  capital  is  embarked  and  no  direct  individual 
liability  for  the  company's  debts.  Its  use  in  connection  with  the 
word  'unincorporated'  would  seem  to  imply  that  the  organization 
should  have  some  of  the  attributes  usually  found  in  corporations. ' ' 

(2)  "The  absolute  powers  of  termination  and  amendment  give 
the  certificate  holders,  as  it  seems  to  me,  the  ultimate  control  of  the 
business  of  the  trust  whenever  they  choose  to  take  that  power  into 
their  hands.  They  have  not  done  so ;  but  the  character  of  the  or- 
ganization is  to  be  gauged  rather  by  the  powers  of  the  certificate 
holders,  than  by  the  extent  to  which  those  powers  have  as  yet  been 
exercised.  The  analogy  between  the  respondent  organization  and 
a  corporation  is  apparent.  The  certificate  holders  clearly  possess 
many  of  the  most  characteristic  powers  of  stockholders.  If  the 
expression  'unincorporated  company'  in  the  Bankruptcy  Act  does 
not  describe  such  an  organization  as  the  respondent,  it  is  difficult 
to  see  what  meaning  can  be  given  to  those  words." 

THE  ATHERTON  MILLS  v.  JOHNSTON 

(U.  S.  Supreme  Court,  Oct.  Term,  1921) 
(Not  yet  reported) 

Record:  Child  Labor  Tax  Act,  approved  February  24,  1919. 
In  equity.  On  appeal  from  order  of  district  court  granting  an  in- 
junction.   Decree  reversed  with  direction  to  dismiss  the  bill. 

Facts:  The  plaintiffs  were  father  and  son.  The  bill  alleged 
that  the  son  was  in  the  employ  of  the  defendant ;  that  by  the  terms 
of  the  Child  Labor  Tax  Act  the  defendant  was  subject  to  a  tax  of 
one-tenth  of  its  annual  profits  if  it  employed  a  child  within  the 
ages  of  fourteen  and  sixteen  for  more  than  eight  hours  a  day,  six 
days  a  week,  or  other  than  at  certain  hours  of  the  day;  and  that 
defendant  was  about  to  discharge  the  minor  complainant  because 
of  this  Act.  The  bill  prayed  for  an  injunction.  The  defendant 
admitted  all  of  the  allegations  except  the  invalidity  of  the  Act. 


545  U.  S.  TAX  CASES  841 

Question:     See  Decision  below. 

Decision:  After  expressing  doubt  as  to  whether  this  was  a 
real  case  within  the  meaning  of  the  Constitution  upon  which  the 
judgment  of  this  court  as  to  the  validity  of  an  Act  of  Congress 
under  the  Constitution  can  be  involved,  the  court  pointed  out  that 
the  lapse  of  time  since  the  case  was  heard  in  the  District  Court 
had  brought  the  minor  to  an  age  which  is  not  within  the  ages 
affected  by  the  Act.  Therefore,  the  Act  cannot,  even  if  valid, 
affect  him  further.  The  case  for  an  injunction  had,  therefore, 
become  moot  and  the  court  could  not  consider  it. 

BAILEY,  COLLECTOR  v.  THE  DREXEL  FURNITURE 

COMPANY 

(U.  S.  Supreme  Court,  May  15,  1922) 
(Not  yet  reported) 

Record:  Child  Labor  Tax  Act,  approved  February  24,  1919. 
Suit  to  recover  tax  paid  under  protest.  On  writ  of  error  to  reverse 
judgment  entered  by  District  Court  in  favor  of  plaintiff  on  de- 
murrer to  an  amended  complaint. 

Facts:  On  September  20,  1921,  the  plaintiff,  a  company  en- 
gaged in  the  manufacture  of  furniture  in  North  Carolina,  received 
notice  from  the  collector  that  it  had  been  assessed  $6,312.79  for 
having  during  the  taxable  year  employed  and  permitted  to  work 
in  its  factory  a  child  under  fourteen  years  of  age,  thus  incurring 
the  tax  of  ten  per  cent  on  its  net  profits  for  that  year.  The  com- 
pany paid  the  tax  under  protest,  and  after  rejection  of  its  claim 
for  a  refund,  brought  this  suit. 

Question:  Is  the  Child  Labor  Tax  Law  a  regulation  of  the 
employment  of  child  labor  in  the  States  and,  hence,  invalid  as  an 
infringement  of  an  exclusively  State  function ;  or  is  the  law  a  mere 
excise  tax  levied  by  the  Congress  of  the  United  States  under  its 
broad  power  of  taxation  and  hence  valid  as  such  ? 

Decision :  The  Act  provides  a  heavy  exaction  for  a  departure 
from  a  detailed  and  specified  course  of  conduct  in  business.  If  an 
employer  departs  from  this  course  he  is  to  pay  an  amount  not  pro- 
portioned in  any  degree  to  the  extent  or  frequency  of  the  depart- 


842  505  U.  S.  TAX  CASES 

ures  but  is  to  be  paid  by  the  employer  in  full  measure  whether  he 
employs  five  hundred  children  for  a  year,  or  employs  only  one  for 
a  day.  "Moreover,  if  he  does  not  know  the  child  is  within  the 
named  age  limit,  he  is  not  to  pay;  that  is  to  say,  it  is  only  where 
he  knowingly  departs  from  the  prescribed  course  that  payment  is 
to  be  exacted.  Scienters  are  associated  with  penalties,  not  with 
taxes.  The  employer's  factory  is  to  be  subject  to  inspection  at 
any  time  not  only  by  the  taxing  officers  of  the  Treasury,  the  De- 
partment normally  charged  with  the  collection  of  taxes,  but  also 
by  the  Secretary  of  Labor  and  his  subordinates  whose  normal 
function  is  the  advancement  and  protection  of  the  welfare  of  the 
workers.  In  the  light  of  these  features  of  the  Act,  a  court  must 
be  blind  not  to  see  that  the  so-called  tax  is  imposed  to  stop  the 
employment  of  children  within  the  age  limits  prescribed.  Its  pro- 
hibitory and  regulatory  effect  and  purpose  are  palpable.  All  others 
see  and  understand  this.  How  can  we  properly  shut  our  minds 
to  it?"     *     •     ♦ 

*  *  Out  of  a  proper  respect  for  the  acts  of  a  co-ordinate  branch 
of  the  Government,  this  court  has  gone  far  to  sustain  taxing  acts 
as  such,  even  though  there  has  been  ground  for  suspecting,  from 
the  weight  of  the  tax,  it  was  intended  to  destroy  its  subject.  But 
in  the  Act  before  us,  the  presumption  of  validity  can  not  prevail, 
because  the  proof  of  the  contrary  is  found  on  the  very  face  of  its 
provisions.  Grant  the  validity  of  this  law,  and  all  that  Congress 
would  need  to  do  hereafter,  in  seeking  to  take  over  to  its  control 
any  one  of  the  great  number  of  subjects  of  public  interest,  juris- 
diction of  which  the  States  have  never  parted  with,  and  which  are 
reserved  to  them  by  the  Tenth  Amendment,  would  be  to  enact  a 
detailed  measure  of  complete  regulation  of  the  subject  and  enforce 
it  by  a  so-called  tax  upon  departures  from  it.  To  give  such  magic 
to  the  word  "tax"  would  be  to  break  down  all  constitutional  limi- 
tation of  the  powers  of  Congress  and  completely  wipe  out  the 
sovereignty  of  the  States. "     *     •     • 

"For  the  reasons  given,  we  must  hold  the  Child  Labor  Tax 
Law  invalid,  and  the  judgment  of  the  District  Court  is  affirmed." 


545  U.  S.  TAX  CASES  843 

BAILEY,  COLLECTOR  v.  GEORGE 

(U.  S.  Supreme  Court,  October  Term,  1921) 

(Not  yet  reported) 

Record :  Child  Labor  Tax  Act.  In  Equity.  On  appeal  from 
decree  entered  by  District  Court  (274  Fed.  639)  granting  an  in- 
junction. Reversed  and  remanded  with  directions  to  dismiss  the  bill. 

Facts:  The  decree  recited  that  complainants  operated  a  cot- 
ton goods  plant;  that  defendant  collector  assessed  against  them  a 
tax  of  $2,098.06  on  the  ground  that  they  employed  children  in 
their  factory  within  the  age  limits  prescribed  in  the  Child  Labor 
Tax  Act ;  that  complainants  filed  a  claim  for  abatement  of  the  tax 
which  was  denied  and  that  the  defendant  was  about  to  distrain 
complainant 's  property. 

Question:  Does  complainant's  bill  set  forth  ground  for  equi- 
table relief  t 

Decision:  The  court  points  out  that  Section  3224  R.  S.  pro- 
hibits any  suit  for  the  purpose  of  restraining  collection  of  any  tax. 
"The  averment  that  a  taxing  statute  is  unconstitutional  does  not 
take  this  case  out  of  the  section.  There  must  be  some  extraor- 
dinary and  exceptional  circumstance  not  here  averred  or  shown 
to  make  the  provisions  of  the  section  inapplicable.  Dodge  v.  Brady, 
240  U.  S.  122,  126,  60  L.  ed.  560,  562,  36  Sup.  Ct.  Rep.  277.  In 
spite  of  their  averment,  the  complainants  did  not  exhaust  all  their 
legal  remedy.  They  might  have  paid  the  amount  assessed  under 
protest,  and  then  brought  suit  against  the  collector  to  recover  the 
amount  paid,  with  interest.  No  fact  is  alleged  which  would  pre- 
vent them  from  availing  themselves  of  this  form  of  remedy." 

BALTIMORE  &  OHIO  RAILROAD  CO.  v.  UNITED  STATES 

(United  States  Court  of  Claims,  May  16,  1921) 

(Not  yet  reported) 

Record:  Stamp  Act  of  October  22,  1914.  Suit  to  recover 
stamp  taxes  paid.  On  demurrer  to  plaintiff's  petition.  Demurrer 
sustained  and  petition  dismissed. 

Facts:  On  October  1,  1915,  thirteen  railroad  companies  exe- 
cuted and  delivered  to  the  plaintiff  company  deeds  conveying  the 


844  545  U.  S.  TAX  CASES 

property  of  these  companies  to  the  plaintiff.  The  plaintiff  com- 
pany having  some  doubt  as  to  the  application  of  the  Stamp  Act  to 
the  transaction  applied  to  the  Commissioner  for  a  ruling,  at  the 
same  time  exhibiting  three  of  the  deeds.  The  Commissioner  held 
adversely  to  plaintiff 's  contention,  and  the  plaintiff,  without  protest, 
affixed  to  each  of  the  deeds  the  requisite  amount  of  stamps.  Four 
years  thereafter  the  Commissioner  in  construing  the  Act  of  1918 
held  * '  that  where  no  valuable  consideration  passed,  stamps  were  not 
required  on  conveyances."  On  September  22,  1919,  the  plaintiff 
filed  with  the  Commissioner  its  claim  for  refund  of  the  said  taxes, 
which  was  based  upon  the  above  ruling  of  the  Commissioner  which 
apparently  was  applicable  to  plaintiff's  case.  This  claim  was 
rejected  because  of  the  intervention  of  the  statute  of  limitations 
which  provided  for  a  period  of  two  years  after  the  purchase  of  the 
stamps  from  the  Government  for  the  filing  of  a  claim  for  refund. 

Question:  The  plaintiff's  contention  was  that  the  claim  for 
refund  filed  in  1919  was  no  more  nor  less  than  an  amendment  of  its 
so-called  informal  claim  for  an  abatement  filed  in  1915,  thus  per- 
fecting the  former  and  for  the  first  time  claiming  a  refund  of  the 
taxes,  thereby  escaping  the  statute  of  limitations. 

Decision :  *  *  The  facts  alleged  bear  absolutely  no  similarity  to 
either  a  claim  for  abatement  or  refund  of  the  taxes  now  alleged  to 
be  illegal.  On  the  contrary,  prior  to  affixing  the  stamps  to  the  deeds 
in  issue  the  plaintiff  company  exhibited  to  the  commissioner  three 
specific  copies  of  the  deeds,  each  containing  only  a  nominal  con- 
sideration, stating  that  in  its  opinion  no  stamp  tax  should  apply 
to  said  deeds,  and  asking  for  a  ruling  of  the  commissioner  with 
respect  thereto.  The  commissioner  promptly  complied  with  the 
request,  and  the  plaintiff  instead  of  asking  for  an  abatement  of  the 
same  thereafter  purchased  the  stamps,  affixed  them  to  the  deeds, 
cancelled  the  same,  and  accepted  the  ruling  of  the  commissioner, 
never  seeking  in  any  manner  to  challenge  its  conclusiveness  until 
some  four  years  later  it  discovered  in  the  decision  of  a  case  in  which 
it  was  in  nowise  concerned  there  existed  a  possibility  to  proceed 
now  as  it  should  have  proceeded  four  years  ago.  The  widest  lati- 
tude has  been  allowed  the  vigilant  in  the  matter  of  amendment  of 
claims  for  refund  of  illegal  taxes,  but  no  authority  has  been  cited 


545  U.  S.  TAX  CASES  845 

wherein  the  courts  have  gone  to  the  extreme,  no  matter  how 
apparent  the  equities  of  the  situation,  in  sustaining  a  claim  after  a 
long  repose  and  which  would  doubtless  have  continued  in  such  a 
state  say  for  the  persistence  and  vigilance  of  a  later  and  another 
claimant,  the  ruling  in  whose  case  affords  prospects  of  recovery  for 
an  abandoned  claim. 

"We  think  the  Commissioner  was  right  when  he  rejected  the 
claim. ' ' 

BALTIMORE  TALKING  BOARD  CO.  v.  MILES,  COLLECTOR 

(U.  S.  Circuit  Court  of  Appeals,  Fourth  Circuit,  1922) 

(280  Fed.  658) 

Record :  Revenue  Act  of  1918.  Action  to  recover  taxes  paid. 
Error  to  U.  S.  District  Court,  District  of  Maryland,  which  ren- 
dered judgment  for  defendant.  273  Fed.  531.  Judgment  afiflrmed. 
Petition  for  writ  of  certiorari  denied,  June  5,  1922. 

Facts :  A  tax  of  $202.81  was  collected  from  the  plaintiff,  being 
10%  of  i+s  gross  sales  of  ouija  boards,  on  a  theory  that  ouija  boards 
were  ''games"  within  the  meaning  of  Section  900  of  the  statute. 

Questions:  (1)  Did  the  mere  fact  that  ouija  boards  were 
not  expressly  mentioned  in  the  statute  prevent  their  being  taxable  ? 

(2)  Are  ouija  boards  taxable  under  Section  900  of  the  statute 
as  "games."? 

(3)  What  weight  is  to  be  given  to  the  findings  and  practice 
of  the  administrative  officers  of  the  Government  ? 

Decision:  (1)  "In  Gould  v.  Gould  (245  U.  S.  151)  the  court 
says:  'In  the  interpretation  of  statutes  levying  taxes  it  is  the 
established  rule  not  to  extend  their  provisions,  by  implication, 
beyond  the  clear  import  of  the  language  used,  or  to  enlarge  their 
operations  so  as  to  embrace  matters  not  specifically  pointed  out.  In 
case  of  doubt  they  are  construed  most  strongly  against  the  Govern- 
ment, and  in  favor  of  the  citizen.'  *  *  *  But  the  doubt  as  to 
the  meaning  of  the  statute  must  be  one  which  remains  after  all 
recognized  rules  for  ascertaining  its  meaning  have  been  tried.  As 
to  the  analogous  rule  requiring  strict  construction  of  statutes 
exempting  property  from  taxation  the  Supreme  Court  has  said: 


846  545  U.  S.  TAX  CASES 

*  Its  proper  office  is  to  help  solve  ambiguities,  not  to  compel  an  imme- 
diate surrender  to  them — to  be  an  element  in  decision,  and  effec- 
tive, maybe,  when  all  other  tests  of  meaning  have  been  employed 
which  experience  has  afforded,  and  which  it  is  the  duty  of  courts 
to  consider  when  rights  are  claimed  under  a  statute.'  (Citizens 
Bank  v.  Parker,  192  U.  S.  73,  86.)  Doubt  as  to  the  meaning  of  a 
word  is  often  removed  by  consideration  of  the  legislative  intent 
as  shown  by  the  entire  statute,  (American  Surety  Co.  v.  District  of 
Columbia,  224  U.  S.  491. )  Considering  the  comprehensive  scheme  of 
taxation  which  the  statute  was  intended  to  provide  its  words  should 
not  be  given  a  narrow  meaning.  The  whole  statute  shows  the  inten- 
tion to  tax  sales  of  all  articles  which  were  thought  of  and  named 
and  which  could  be  embraced  in  words  of  general  description  known 
generally  as  luxuries:  that  is,  articles  not  reasonably  necessary  to 
comfort  according  to  the  average  standards  of  American  life.  Even 
when  seriously  used  the  ouija  board  certainly  comes  within  the 
general  spirit  and  purpose  of  the  statute." 

(2)  "On  the  whole  the  conclusion  seems  fair  that  the  present 
chief  purpose  of  the  ouija  board  is  to  supply  amusement  and  diver- 
sion and  that  it  should  be  held  to  fall  under  the  comprehensive  term 
'games'  within  the  meaning  of  the  statute." 

(3)  "The  principle  is  also  to  be  borne  in  mind  in  support  of 
this  conclusion  that  the  findings  and  practice  of  the  administrative 
officers  of  the  Government  are  presumed  to  be  based  on  fair  con- 
clusions as  the  result  of  the  investigation  required  of  them  by  Sec- 
tions 3165  and  3172  of  the  Revenue  Act  of  1918." 

BANKERS'  AND  PLANTERS'  MUTUAL  INSURANCE  ASSO- 
CIATION V.  WALKER,  COLLECTOR 
(U.  S.  Circuit  Court  of  Appeals,  Eighth  Cir.,  February  10,  1922) 

(279  Fed.  53) 

Record :  Revenue  Act  of  1917.  Action  to  recover  taxes  paid 
under  protest.  Judgment  for  defendant.  In  error  to  District 
Court  of  the  United  States  for  the  Eastern  District  of  Arkansas. 
Judgment  affirmed. 

Facts :  The  plaintiff  was  an  association  organized  for  the  pui»- 
pose  of  insuring  the  lives  of  its  members  and  the  plan  of  operation 


545  U.  S.  TAX  CASES  847 

divided  members  into  "circles"  of  approximately  one  thousand 
each.  In  the  event  of  death  of  any  member  the  other  members  of 
that  circle  were  assessed  pro  rata  according  to  age  and  length  of 
membership,  beginning  with  a  minimum  charge  of  25c  and  a  maxi- 
mum charge  of  $1.12  for  each  death.  The  amount  of  insurance  of 
each  member  at  entrance  was  $100,  which  amount  increased  after 
the  first  six  months  at  the  rate  of  $12.50  per  month  to  a  maximum 
of  $1,000,  provided  all  dues  and  assessments  were  promptly  paid. 
The  assessments  were  suflScient  to  provide  for  maintaining  the  busi- 
ness organization  and  operation  but  no  reserves,  surplus  or  other 
funds  were  provided,  and  no  dividend  or  profit  could  be  earned.  A 
premium  tax  was  assessed  and  collected  under  the  provisions  of 
Section  504  of  the  Revenue  Act  of  1916  upon  the  $100  original  cer- 
tificates and  also  upon  the  accrued  valuation  of  $12.50  monthly 
after  the  first  six  months.  The  plaintiff  claimed,  first,  that  it  was 
not  subject  to  tax  under  the  provisions  of  Section  504,  but  if  subject 
to  tax  at  all,  then  only  upon  the  basis  of  the  original  certificate 
value  of  $100. 

Questions:  (1)  Was  the  plaintiff  an  insurance  company 
within  the  meaning  of  Section  504  of  the  Revenue  Act  of  1917 
imposing  a  tax  on  each  $100  or  fractional  part  thereof  of  the 
amount  for  which  any  life  is  insured  under  any  policy  of  insurance, 
or  other  instrument,  by  whatever  name  the  same  is  called  ? 

(2)  Did  the  plaintiff  come  within  the  exemptions  provided  for 
in  subdivision  (d)  of  Section  504  of  the  Revenue  Act  of  1917  ? 

(3)  "Was  the  plaintiff  **a  like  organization"  within  the  mean- 
ing of  subdivision  (10)  of  Section  11a  Revenue  Act  of  1916? 

(4)  Was  the  plaintiff  properly  taxed  upon  the  accrued  increase 
in  valuation  upon  the  basis  of  $12.50  monthly  as  well  as  upon  the 
initial  certificate  value  of  $100? 

Decision:  (1)  "The  argument  as  to  the  first  contention  is 
that  plaintiff  is  not  an  insurance  company,  but  merely  '  a  mutual  aid 
society,  organized  for  the  mutual  benefit  of  its  members  upon  the 
pro  rata  assessment  plans,  has  no  capital  stock,  and  makes  absolutely 
no  profit  for  the  members  thereof.'  This  contention  is  unsound, 
because  this  is  a  purely  life  insurance  arrangement  and  business, 


848  545  U.  S.  TAX  CASES 

and  Section  504  does  not  require  profits  or  dividends  as  a  prerequi- 
site to  this  tax. ' ' 

(2)  Said  association  is  not  exempt  under  Subdivision  (d)  of 
Section  504  of  the  Revenue  Act  of  1917  which  exempts  policies 
issued  by  associations  whose  income  is  exempt  from  taxation  under 
title  I  of  the  Revenue  Act  of  1916,  the  association  not  coming  within 
the  meaning  of  either  the  third,  sixth,  or  tenth  paragraph  of  Sec- 
tion 11a  of  said  latter  Act,  which,  respectively,  limit  the  exemption 
to  fraternal  beneficiary  societies  operating  under  the  lodge  system, 
to  non-profit  organizations  which  are  organized  and  operated  exclu- 
sively for  religious,  charitable,  scientific,  or  educational  purposes, 
and  to  farmers '  or  other  mutual  hail,  cyclone,  or  fire  insurance  com- 
panies, mutual  or  co-operative  telephone  companies,  or  like  organi- 
zations of  a  purely  local  character,  the  income  of  which  consists 
solely  of  assessments,  dues,  and  fees  collected  from  members  for 
the  sole  purpose  of  meeting  its  expenses. 

(3)  "It  is  also  evident  that  plaintiff  does  not  come  within  the 
'like  organization  of  a  purely  local  character,  the  income  of  which 
consists  solely  of  assessments,  dues  and  fees  collected  from  members 
for  the  sole  purpose  of  meeting  its  expenses'  as  set  out  in  subdivi- 
sion 'Tenth'  of  Section  11a,  above  quoted.  This  is  not  a  'purely 
local'  organization;  its  income  is  not  collected  for  the  mere  purpose 
of  'meeting  its  expenses,'  but  goes  much  beyond  this  and  covers 
insurance  payments;  and  it  is  not  a  'like  organization',  such  organi- 
zations being  'farmers'  or  other  mutual  hail,  cyclone  or  fire  insur- 
ance company,  mutual  ditch  or  irrigation  company,  mutual  or  co-op- 
erative telephone  company. '  Life  insurance  is  too  well  known  and 
important  for  us  to  suppose  that  Congress  would  detail  hail,  cyclone, 
and  fire  insurance,  and  intend  life  insurance  to  be  included  in  the 
general  expression  of  'life  association'.  The  plaintiff  is  clearly  lia- 
ble to  the  tax." 

(4)  "The  provisions  of  the  statute  relied  upon  •  •  *  are 
as  follows :  '  There  shall  be  levied,  assessed,  collected,  and  paid  the 
following  taxes  on  the  issuance  of  insurance  policies:  (a)  Life 
insurance :  a  tax  equivalent  to  8c  on  each  $100  or  fractional  part 
thereof  of  the  amount  for  which  any  life  is  insured  under  any  policy 
of  insurance,  or  other  instrument,  by  whatever  name  the  same 


545  U.  S.  TAX  CASES  '        849 

is  called.'  This  quoted  passage  defines  the  subject  of  taxation  to  be 
'the  issuance  of  insurance  policies.'  It  then  sets  out  the  rate  of 
taxation  on  the  issuance  of  life  insurance  policies  to  be  8c  'on  each 
$100  or  fractional  part  thereof  of  the  amount  for  which  any  life  is 
insured  under  any  policy  of  insurance ',  etc.  The  policies,  or  instru- 
ments, of  insurance  issued  by  plaintiff  called  for  $100  and  accumu- 
lations. Every  condition  of  the  contract  which  might  affect  the 
payment  of  the  accumulations  might  equally  effect  the  minimum  of 
$100.  Therefore  the  amount  of  insurance  called  for  by  the  contract 
cannot,  in  any  sense,  be  said  to  be  $100,  rather  than  that  sum  plus 
accumulations  which  might  have  been  earned  by  the  member.  Such 
accumulations,  do  not,  therefore,  fall  without  the  intent  of  the 
statute.  *  *  *  The  assessment  was  properly  levied  against  the 
$100  minimum  and  the  accumulations  earned  at  the  time  of  the 
assessment,  because  that  total  sum  represented  at  that  time,  under 
this  form  of  insurance  contract,  the  '  amount  of  insurance '  intended 
by  the  statute. ' ' 

BANI^ERS'  TRUST  CO.  v.  STATE 

(Supreme  Court  of  Errors  of  Conn,,  June  1,  1921) 

(114  Atl.  104) 

Record :  Conn.  Gen.  St.  Sec.  1190.  Application  in  nature  of 
an  appeal  wherein  the  state  demurred  and  the  court  reserved  the 
questions  of  law  arising  on  the  demurrer  for  the  advice  of  the 
Supreme  Court  of  Errors.  Judgment  advised  to  sustain  demurrer 
and  dismiss  appeal. 

Facts :  The  plaintiffs,  as  executors  of  an  estate,  were  assessed 
the  sum  of  $10,286.39  under  Gen.  St.  Sec.  1190.  This  statute  pro- 
vides that  property  which  has  not  been  subject  to  a  town  or  city  or 
state  tax  during  the  year  preceding  the  death  of  the  decedent  is 
liable  to  a  tax  of  2  per  cent  of  its  appraised  value  for  the  five  years 
next  preceding  the  date  of  death  of  decedent,  pro\'ided  that  a  pro- 
portionate reduction  of  the  tax  may  be  had  by  proof  that  any  part 
of  the  tax  has  been  paid  or  that  the  decedent  did  not  own  any  of 
this  property  during  this  period.  Thereupon  the  executors  made 
this  application  in  the  nature  of  an  appeal. 

Questions:  (1)  Is  the  tax  imposed  under  Gen.  St.  Sec.  1190 
a  succession  tax  ? 


850  545  U.  S.  TAX  CASES 

(2)  Is  the  statute  authorizing  the  tax  in  question  unconstitu- 
tional ? 

Decision:  (1)  The  tax  is  not  a  succession  tax  nor  in  the 
nature  of  one  because  it  is  imposed  upon  the  gross  value  of  that  por- 
tion of  the  estate  which  has  not  paid  a  state  or  local  tax  in  the  year 
preceding  the  decedent's  death  and  also  because  there  is  absent  the 
classification  which  all  succession  taxes  make.  ' '  This  is  not  the  com- 
pulsory payment  of  a  defined  tax,  but  is  the  infliction  of  a  punish- 
ment for  a  violation  of  a  public  duty.  The  authors  of  this  statute 
intended  it  as  and  for  a  penalty  tax,  and  such  we  esteem  it  to  be. 
The  right  of  the  state  vests  at  the  death  of  the  decedent  to  the 
transfer  tax  or  the  penalty  in  the  nature  of  an  estate  tax. ' ' 

(2)   The  statute  is  not  unconstitutional  for: 

It  is  not  void  as  an  ex  post  facto  law  for  this  provision  relates 
only  to  laws  respecting  criminal  punishment. 

It  does  not  impose  an  excessive  fine  in  violation  of  the  Connecti- 
cut Constitution,  because  the  offense  here  punished  is  neither  a 
crime  nor  a  misdemeanor  and  so  the  constitutional  provision 
involved  has  no  possible  relation  to  it. 

It  is  not  in  conflict  with  the  Fourteenth  Amendment  to  the 
United  States  Constitution,  as  depriving  creditors  and  distributees 
of  their  property  without  due  process,  because  the  right  to  dispose 
of  one 's  property  by  will  and  the  right  to  have  it  disposed  of  by  the 
law  after  decease  is  created  by  statute,  and  therefore  the  state  may 
impose  such  conditions  upon  the  exercise  of  this  right  as  it  may 
determine.  Furthermore,  the  statute  can  not  be  pronounced  so 
purely  arbitrary  as  to  be  prohibited  by  the  Fourteenth  Amendment. 

BEEGDOLL  v.  POLLOCK 
(U.  S.  Supreme  Court,  1877) 
(95  U.  S.  337) 
Record :     Sees.  3225,  3226,  3337,  R.  S.    Action  to  recover  taxes 
paid.    Appeal  from  judgment  for  defendant.    Judgment  affirmed. 
Facts :    An  additional  assessment  was  collected  from  the  plain- 
tiffs for  having  removed  1350  barrels  of  beer  without  the  proper 
stamps.    Sec.  3337,  R.  S.  required  that  every  manufacturer  of  fer- 
mented liquors  keep  a  record  of  the  quantity  produced  and  the 
quantity  sold  or  removed  for  consumption,  and  the  quantity  of 
material  purchased.     A  return  was  also  required  to  be  rendered 


545  U.  S.  TAX  CASES  851 

each  month.  The  plaintiffs  offered  to  prove  in  the  trial,  by  wit- 
nesses, that  their  returns  did  not  contain  an  understatement. 

Question :  In  view  of  the  requirement  that  books  be  kept,  was 
the  evidence  of  witnesses  admissible  to  show  tliat  the  returns  were 
not  understated? 

Decision:  "His  books  are  not  necessarily  conclusive  for  or 
against  the  government  under  all  circumstances;  but  if  properly 
kept,  as  they  must  be  to  avoid  the  penalties  of  the  law,  they  ought, 
so  to  speak,  to  furnish  the  base  from  which  his  evidence  must 
spring.  *  *  *  The  books,  with  proper  explanations  in  respect  to 
entries  which  appear  in  them,  ought  to  constitute  the  best  evidence 
in  the  ease ;  and  until  it  is  shown  that  they  cannot  be  produced,  or 
that  they  do  not  contain  the  information  required,  no  evidence  of 
such  remote  circumstances  is  admissible.  In  this  case  there  was  no 
attempt  to  account  for  the  absence  of  the  books,  or  any  claim  of 
defective  entries  and  we  think  the  court  did  not  err  in  excluding  the 
testimony. ' ' 

EVEEETT  C.  BROWN  AND  S.  B.  ST.  JOHN,  CO-PARTNERS, 
DOING  BUSINESS  AS  BROWN-ST.  JOHN  CO., 
V.  SMIETANKA,  COLLECTOR  OF  IN- 
TERNAL REVENUE 
(U.  S.  District  Court,  Northern  District,  Illinois,  June  10,  1921.) 
(Case  No.  33,167,  not  yet  reported) 
Record :     Revenue  Act  of  1918.    Action  at  law  to  recover  spe- 
cial taxes  paid  under  protest,  levied  under  par.  1,  section  1001  of 
the  Revenue  Act  of  1918  on  the  privilege  of  doing  business  as  brok- 
ers.   Defendant  filed  a  general  demurrer  to  plaintiff's  declaration. 
Demurrer  overruled.    Judgment  for  plaintiff. 

Facts:  It  was  alleged  in  plaintiff's  declaration  that  the 
plaintiffs  are  live-stock  commission  merchants  in  Chicago,  111., 
dealing  in  cattle,  sheep  and  hogs,  consigned  to  them;  that  under 
par.  1,  section  1001  of  the  Revenue  Act  of  1918  the  Collector  of 
Internal  Revenue  exacted  of  them  a  special  tax ;  that  said  taxing 
statute  is  in  part  as  follows: 

"Brokers  shall  pay  $50.  Every  person  whose  business  it  is 
to  negotiate  purchases  or  sales  of  stocks,  bonds,  exchange,  bullion, 
coined  money,  bank  notes,  promissory  notes,  other  securities,  prod- 
uce or  merchandise,  for  others  shall  be  regarded  as  a  broker." 


852  545  U.  S.  TAX  CASES 

The  defendant  filed  a  general  demurrer  to  the  declaration,  and 
contended  thereunder  that  cattle,  sheep  and  hogs  are  "merchan- 
dise, ' '  and  come  within  the  Act. 

Question:  Does  the  word  ** merchandise, "  as  used  in  section 
1001  of  the  Revenue  Act  of  1918,  include  "live  stock,"  so  as  to 
render  live  stock  commission  brokers  subject  to  the  special  tax 
imposed  on  "brokers"  by  the  provisions  of  said  statute? 

Decision:  U.  S.  District  Judge  Page  in  overruling  defend- 
ant's demurrer,  and  holding  that  said  section  was  not  intended 
to  cover  live  stock  brokers,  stated  that  in  several  cases  the  courts 
have  said  that  while  live  stock  does  not  usually  come  within  the 
term  "merchandise,"  yet  sometimes  it  may;  U.  S.  v.  One  sorrel 
horse,  27  Fed.  Cases,  15,953 ;  JeweU  v.  Board  of  Trustees,  84  N.  W. 
975  (Iowa).  The  court,  how'ever,  declined  to  agree  with  the  Gov- 
ernment's contention  that  the  special  reasons  for  holding  that  live 
stock  comes  under  the  1918  Act  are  found  in  the  various  Acts  pro- 
viding for  the  assessment  of  special  taxes.  The  court  quoted  from 
section  79  of  the  Act  of  June  30,  1864,  which  included  brokers, 
horsedealers,  cattle  brokers,  produce  brokers  and  commercial 
brokers.  Reference  is  then  made  to  the  Act  of  October  22,  1914, 
which  provided  for  a  tax  on  brokers,  commercial  brokers  and 
commission  merchants.  It  is  pointed  out  that  in  the  1918  Act 
commercial  brokers,  cattle  brokers,  or  commission  merchants  are 
not  designated  by  name. 

The  court  then  concluded  as  follows : 

"From  a  consideration  of  the  several  acts  it  is  perfectly  clear 
that  there  was  not  running  through  all  of  the  acts  any  well  defined 
scheme  of  classification  of  subjects  to  be  taxed.  For  instance  in 
the  Acts  of  1898  and  1914,  horse  dealers  and  four  different  sorts 
of  brokers  are  mentioned.  In  the  Acts  of  1898  and  1914  only  two 
kinds  of  brokers  were  taxed,  and  in  the  Act  of  1918  only  one  kind 
was  taxed.  That  is  to  say;  in  the  Acts  of  1864  and  1866  there 
were  brokers,  cattle  brokers,  produce  brokers  and  commercial 
brokers;  in  the  Acts  of  1898  and  1914  there  were  brokers  and 
commercial  brokers ;  and  in  the  Act  of  1918  just  brokers.  In  none 
of  the  acts  prior  to  1918  was  the  word  'merchandise'  used  in 
connection  with  any  kind  of  a  broker,  except  that  it  appeared  in 
all  of  the  acts  defining  a  commercial  broker,  and  in  the  section  of 
the  Act  of  1914  taxing  commission  merchants. 


545  U.  S.  TAX  CASES  853 

"The  theory  of  the  Government  is  that  the  word  'merchan- 
dise' in  the  Act  of  1918  was  adopted  from  the  sections  relating  to 
commission  merchants  in  the  Act  of  1914,  but  from  a  reading  of 
the  several  acts  it  seems  to  be  much  more  probable  that  it  was 
adopted  from  the  sections  relating  to  a  commercial  broker, 
because  all  of  the  sections  relating  to  commercial  brokers,  as  well 
as  the  section  here  in  question,  describe  not  only  a  broker,  but  also 
a  commercial  broker  as  a  person  whose  business  it  is  to  negotiate 
purchases  or  sales,  whereas,  a  commission  merchant  is  defined  as  a 
person,  etc.,  whose  business  or  occupation  it  is  to  receive  into  his 
or  its  possession  any  goods,  etc.  It  will  be  noted  that  in  all  of  the 
acts  relating  to  brokers,  including  the  one  in  question,  the  business 
to  be  done,  that  is  negotiating  sales  or  purchases  of  goods,  etc., 
was  not  changed,  but  the  things  to  be  negotiated  about  were 
varied  as  indicated. 

"The  allegations  of  the  declaration  would  bring  the  plaintiffs 
within  the  terms  of  the  Act  of  1914  relating  to  commission  mer- 
chants, if  the  word  *  merchandise, '  as  used  in  that  section  covered 
live  stock,  but  live  stock  does  not  in  my  opinion  come  within  the 
provisions  of  the  Act  of  1918.  A  thing  is  not  to  be  taxed  unless  it 
is  plainly  within  the  meaning  of  the  words  used.  (First  Trust  and 
Savings  Bank  v.  Smietanka,  268  Fed.  230),  The  demurrer  is 
overruled." 

BUGBEE,  COMPTROLLER  v.  ROEBLING  et  al. 
(Court  of  Errors  and  Appeals  of  N.  J.,  June  21, 1920) 
(111  Atl.  29) 
Record:     New  Jersey  Transfer  Tax  Act  as  amended  in  1914 
(P.  L.  267).     Proceedings  relative  to  determination  of  tax.    Judg- 
ment in  favor  of  executors  and  the  comptroller  appeals.    Affirmed. 
Facts:     See  Question. 

Question :  Should  the  amount  of  the  federal  estate  tax  be  de- 
ducted in  ascertaining  the  clear  market  value  of  the  taxable  trans- 
fer under  the  Transfer  Tax  Act  ? 

Decision:  "We  have  therefore  a  tax  which  the  statute  re- 
quires shall  be  calculated  on  the  value  of  the  ultimate  beneficial 
succession,  at  a  rate  which  depends  upon  the  propinquity  of  the 
legatee  to  the  decedent;  and  each  legatee  sufficiently  near  to  the 


854  545  U.  S.  TAX  CASES 

decedent  is  entitled  to  an  exemption  of  $5,000.  We  think  that 
these  provisions  indicate  that  the  tax  is  to  be  calculated  on  the  bene- 
ficial interest  actually  received  by  the  legatee,  and  not  on  what  he 
would  receive  if  there  were  no  federal  tax."  The  conclusion  of 
the  court,  therefor,  was  that  the  federal  tax  must  be  deducted. 

CAKTIER  et  al.  v.  DOYLE,  COLLECTOR 

(U.  S.  Circuit  Court  of  Appeals,  Sixth  Cir,,  December  15,  1921) 

(277  Fed.  150) 

Record:  Act  of  October  3,  1917.  Action  at  law  to  recover 
excess  profits  taxes  paid  under  protest  under  Sections  201  and  210. 
In  error  to  the  District  Court  which  entered  a  judgment  for  de- 
fendant.    (269  Fed.  647,  ante  126.)     Reversed. 

Facts:  In  1912,  Cartier  and  Holland  entered  into  a  written 
contract  of  partnership  for  the  purpose  of  manufacturing  and 
dealing  in  forest  products.  It  was  further  agreed  that  the  paid-in 
capital  of  the  partnership  should  be  $30,000,  to  be  furnished  by 
Cartier,  as  the  requirements  of  the  partnership  should  appear, 
upon  the  note  or  notes  of  the  partnership  to  be  paid  from  earnings 
of  the  partnership  and  to  bear  legal  rate  of  interest.  It  did  not 
appear  from  the  evidence  that  the  partnership  ever  manufactured 
any  forest  products,  but  it  did  purchase  lumber  and  kindred  com- 
modities for  its  customers.  After  the  organization  of  the  part- 
nership Cartier  furnished  it  some  money  and  took  its  notes  there- 
for, but  in  1914  a  new  arrangement  was  entered  into  by  which  the 
partnership  borrowed  the  money  required  in  its  business  directly 
from  the  bank  and  executed  its  notes  therefor.  These  notes  were 
indorsed  by  both  Cartier  and  Holland,  and  Cartier  left  upon  de- 
posit with  the  bank,  as  collateral  to  his  indorsement  of  these 
notes,  securities  theretofore  deposited  by  him  when  he  borrowed 
the  money  in  his  own  name  and  loaned  it  to  the  partnership.  This 
method  of  transacting  the  partnership  business  was  continued  un- 
til and  during  the  year  1917,  and  in  this  way  the  partnership 
obtained  all  its  capital.  During  the  time  the  partnership  was 
operated  Cartier  drew  out  of  the  business  $11,556.37,  and  Holland, 
$18,906.28,  which  amounts  were  charged  to  them  on  the  books.  If 
these  amounts  were  reckoned  as  assets  of  the  partnership,  then 


545  U.  S.  TAX  CASES  855 

on  January  1,  1917,  there  was  a  net  surplus  of  assets  over  and 
above  liabilities  of  $22,443.80;  otherwise  the  liabilities  of  the 
partnership  would  exceed  its  assets  by  the  sum  of  $7,218.85.  The 
return  of  the  partnership  showed  the  excess  profits  tax  computed 
under  Section  209  of  the  Act,  applying  to  concerns  having  an  in- 
vested capital  not  more  than  nominal.  The  Commissioner  con- 
tended that  the  firm  should  be  assessed  under  Section  201,  upon 
its  invested  capital,  or  under  Section  210,  on  the  ground  that  the 
invested  capital,  although  more  than  nominal,  could  not  be  sat- 
isfactorily determined.  Additional  tax  was  assessed  accordingly 
and  was  paid. 

Question:  Did  the  partnership  described  above,  during  the 
year  1917  have  an  invested  capital  within  the  meaning  of  Sections 
201,  207,  and  210  of  Title  2  of  the  Act  of  October  3,  1917  ? 

Decision:  "If  this  question  were  to  be  determined  separate 
and  apart  from  the  Act  levying  this  excess  profits  tax,  then  it 
would  be  of  easy  solution.  Money  invested  in  a  partnership  busi- 
ness, whether  paid  in  by  the  partners  or  borrowed  from  a  partner 
or  a  bank,  in  the  absence  of  legislation  to  the  contrary,  would  con- 
stitute invested  capital  in  the  ordinary  meaning  and  acceptation 
of  that  term."  The  court  then  calls  attention  to  the  fact  that 
Congress  in  Section  207  has  defined  the  term  "invested  capital" 
and  that  by  such  definition  invested  capital  does  not  include  bor- 
rowed money. 

"It  would  seem  unnecessary  to  say  that  a  private  contract 
between  these  parties  would  not  change  or  affect  in  the  slightest 
degree  the  plain  and  positive  terms  of  the  statute,  declaring  what 
shall  be  included  and  what  shall  not  be  included  as  'invested  capi- 
tal,' for  the  purpose  of  this  tax.  If  the  articles  of  copartnership 
had  provided  that  the  paid-in  capital  of  the  partnership  should  be 
$30,000,  one-third  of  which  should  be  paid  in  cash  or  in  property 
by  the  partners,  and  $20,000  to  be  borrowed  from  a  bank  upon  the 
notes  of  the  partnership,  indorsed  by  the  partners,  and  further  se- 
cured by  the  deposit  of  such  collateral  as  the  bank  might  demand, 
the  money  borrowed  in  pursuance  of  such  partnership  agreement, 
fixing  the  total  capital  of  the  partnership  at  $30,000,  would  neces- 
sarily be  rejected  as  invested  capital  in  the  computation  of  surplus 


856  545  U.  S.  TAX  CASES 

income  taxes  levied  under  this  act.  It  logically  follows  that  if, 
under  this  statutory  definition  of  invested  capital,  money  bor- 
rowed could  not  be  included  as  capital  where  some  substantial 
amount  of  cash  had  actually  been  paid  into  the  partnership  fund 
by  the  partners,  such  borrowed  money  cannot  be  reckoned  as  in- 
vested capital  where  the  partners  contributed  neither  cash  nor 
property  to  the  partnership  fund." 

It  is  also  unnecessary  to  determine  whether  under  the  orig- 
inal agreement  the  money  to  be  furnished  by  Cartier,  to  be  re- 
paid out  of  the  partnership  earnings,  would  or  would  not  be  bor- 
rowed money  within  the  meaning  of  the  Act,  since  this  plan  of 
operation  was  abandoned  in  1914.  "Nor  is  it  important  at  whose 
suggestion  this  plan  of  operation  was  changed  and  a  new  plan 
adopted.  It  is  sufficient  for  the  purposes  of  this  opinion  to  de- 
termine the  legal  effect  of  these  transactions  as  they  occurred 
during  the  taxing  period  of  1917."  (The  trial  court  based  its 
finding  for  the  defendant  upon  the  conclusion  of  law  that  the  col- 
lateral deposited  by  Cartier  as  security  for  his  liability  as  an  in- 
dorser  of  the  partnership  notes  became  a  part  of  the  working  capital 
and  was  used  and  employed  in  the  business  of  the  company  to  the 
same  extent  as  if  it  had  been  paid  directly  into  the  partnership 
funds. )  * '  The  evidence  in  relation  to  these  transactions  permits  of 
no  conclusion  other  than  that  the  money  borrowed  from  the  bank 
upon  the  notes  of  the  partnership  was  'borrowed  money,'  within 
the  meaning  of  Section  207  of  the  Act  of  Congress  approved  Octo- 
ber 3,  1917." 

The  Act  in  question  defines  "invested  capital"  as  follows: 
"  (1)  Actual  cash  paid  in."  There  is  no  claim  made  by  the  Gov- 
ernment that  there  was  any  "actual  cash  paid  in"  to  the  partner- 
ship funds  other  than  the  money  borrowed  from  the  bank  on  the 
notes  of  the  partnership.  "  (2)  The  actual  cash  value  of  tangible 
property  paid  in  other  than  cash  for  stock  or  shares  in  such  corpora- 
tion or  partnership. ' '  In  this  case  there  was  no  tangible  property 
paid  in  by  either  partner  for  the  purpose  named  or  for  any  other 
purpose.  The  collateral  deposited  by  Cartier  could  not  upon  any 
reasonable  hypothesis  be  held  to  be  'tangible  property  paid  in' 
to  the  partnership.     "(3)   Paid-in  or  earned  surplus  and  undi- 


545  U.  S.  TAX  CASES  857 

vided  profits  used  or  employed  in  the  business  exclusive  of  undi- 
vided profits  earned  during  the  taxable  year. ' '  Whether  this  part- 
nership used  or  employed  in  its  business  paid-in  or  earned  surplus 
and  undivided  profits  exclusive  of  undivided  profits  earned  during 
the  taxable  year  is  a  question  of  fact.  The  trial  court  found  as  a 
fact  that  at  the  beginning  of  the  taxable  year  the  liability  of  the 
firm  exceeded  its  assets  by  the  sum  of  $7,218.85.  This  court  has 
no  authority  to  determine  the  weight  of  the  evidence.  The  finding 
of  the  trial  court  in  this  respect  is  fully  sustained  by  substantial 
evidence. 

"For  the  reasons  above  stated,  this  judgment  must  be  re- 
versed, and  the  cause  remanded  for  a  new  trial  in  accordance  with 
this  opinion. ' ' 

CASTNER,  CURBAN  &  BULLITT,  Inc.,  v. 

LEDERER,  COLLECTOR 

(  U.  S.  District  Court,  E.  D.  Penn.,  Aug.  18,  1921) 

(275  Fed.  221) 

Record:  At  Law.  Action  by  Castner,  Curran  &  Bullitt, 
Inc.,  against  Ephram  Lederer,  Collector  of  Internal  Revenue.  On 
trial.     Hearing  without  a  jury.     Findings  made. 

Facts :  The  plaintiff  is  a  Delaware  corporation,  with  a  total 
issued  capital  stock  of  $1,500,000,  of  which  $300,000  is  first  pre- 
ferred stock  issued  for  cash.  The  corporation  is  a  result  of  the 
combination  of  two  business  ventures  and  two  property  interests, 
known  as  the  "Castner"  and  the  ''Hyman"  interests.  This  com- 
bination took  place  in  1916.  The  capital  of  the  plaintiff  con- 
sisted of  all  which  belonged  to  the  two  former  ventures  with 
$300,000  of  cash  capital  contributed  by  Hyman.  For  this  there 
was  issued  to  him  shares  of  first  preferred  stock  of  a  nominal 
value  in  that  sum.  Shares  of  a  nominal  value  of  $600,000  were 
issued  to  each  interest  in  consideration  of  the  making  over  to  the 
new  corporation  of  what  was  represented  in  the  business  of  both 
the  old  ventures.  This  gave  the  corporation  a  nominal  capital 
of  $1,500,000. 

Question:  "The  whole  question^  is  one  of  fact,  to-wit,  the 
value  of  the  property  for  which  the  $1,200,000  of  stock  was  issued. 


858  545  U.  S.  TAX  CASES 

*  *  *  The  plaintiff  asks  the  court  to  find  the  total  value  of  the 
'invested  capital'  (exclusive  of  'intangible'  property  in  excess  of 
$300,000)  to  be  $4,151,138.20.  The  defendant  asks  for  a  finding 
of  the  value  of  the  same  property  of  $725,509.10." 

Decision:  The  finding  of  the  court  was  that:  "The  value 
of  all  the  effects  and  property  of  the  plaintiff  (inclusive  of  the 
$300,000  of  so-called  'cash')  was  at  the  time  affecting  this  tax 
levy  $1,500,000,  and  so  far  as  it  is  a  question  of  fact  the  'in- 
vested capital'  of  the  plaintiff  is  found  for  taxing  purposes  to 
have  been  that  sum."  The  court  pointed  out  that,  while  the  Act 
of  Congress  does  not  limit  the  valuation  of  "tangible"  property 
acquired  by  an  issue  of  stock  to  the  nominal  value  of  the  stock  so 
issued,  as  it  does  in  the  case  of  "intangible"  property,  neverthe- 
less, one  who  contributes  property  to  the  capital  of  a  corporation 
makes  a  declaration  of  its  fair  value.  "It  is  the  common  or  joint 
declaration  of  the  contributor  and  the  corporation.  As  such,  it  is, 
as  against  the  declarants,  evidence  at  least  equally  as  convincing 
as  other  declarations  of  opinion  made  or  procured  subsequently 
when  the  interests  of  the  parties  have  shifted. "  *  *  *  "  '  Actual 
cash  value,'  'value  in  actual  cash,'  and  other  like  expressions 
convey  the  thought  of  the  sum  which  can  be  obtained  for  them  at 
a  fair  sale.  This  means  market  value.  None  of  the  witnesses 
who  testified  to  the  values  given  had  any  such  test  in  mind."  The 
court,  accordingly,  rejected  the  values  placed  by  witnesses  on  the 
property  which  was  largely  in  excess  of  the  nominal  value  of  the 
stock  issued  for  such  property.  Judgment  in  the  case  was  not 
entered  because  the  court  did  not  have  at  hand  the  data  from 
which  the  judgment  could  be  figured.  As  a  consequence,  the 
court  retained  jurisdiction  of  the  cause  for  this  purpose  and 
granted  leave  to  either  party  to  move  for  the  proper  judgment 
with  cost. 

CATHERWOOD  v.  UNITED  STATES 

(U.  S.  District  Court,  E.  D.  Pennsylvania,  1922) 

(280  Fed.  241) 

Record:     Revenue  Act  of  1918.     Action  to  recover  taxes  paid. 

Sur  affidavit  of  defense  raising  questions  of  law.    Judgment  for 

defendant. 


545  U.  S.  TAX  CASES  859 

Facts:  Plaintiff's  testatrix  died  on  August  22,  1920,  and 
letters  testamentary  were  granted  to  the  plaintiff  on  August  25, 
following.  On  February  25,  1921,  plaintiff  filed  a  return  of  the 
income  of  the  testatrix  for  the  period  between  January  1,  1920, 
and  August  22,  1920.  The  income  tax  upon  the  income  of  the 
decedent  for  the  period  in  question  was  paid  at  the  time  of  filing 
the  return.  The  plaintiff  also  filed  a  return  of  the  income  of  the 
estate  for  the  period  between  August  22,  1920,  and  January  1, 
1921,  There  was  no  taxable  net  income  for  this  period.  Plain- 
tiff also  filed  an  estate  tax  return  and  paid  a  tax  of  $10,142,99,  in 
accordance  with  this  return.  The  sum  so  paid  was  in  excess  of 
the  income  tax  paid  on  the  basis  of  the  net  income  of  the  dece- 
dent to  the  time  of  her  death,  and  plaintiff  claimed  that  the  es- 
tate tax  was  properly  deductible  from  the  income  tax  paid,  and 
demanded  return  of  the  latter. 

Question:  "Was  the  estate  tax  paid  deductible,  under  the 
decision  of  U.  S.  v.  Woodward,  256  U.  S.  632,  ante  page  580,  from 
the  gross  income  of  the  decedent  for  the  period  January  1,  1920, 
to  August  22, 1920? 

Decision :  ' '  Upon  a  full  survey  of  the  statute,  our  conclusion 
is  that  there  are  two  taxpayers — and  not  one — the  decedent,  who 
pays  on  his  income  to  the  time  of  his  death,  and  his  estate,  which 
pays  on  the  income  of  the  estate  and  an  estate  tax.  It  is  true  the 
three  taxes  are  paid  out  of  the  estate,  but  the  first  is  paid  as  the 
tax  upon  the  income  of  the  decedent,  and  is  paid  as  all  his  other 
debts  are  paid.  The  other  taxes  are  paid  as  taxes  assessed 
against  the  estate.  If  the  two  income  taxes  were  one,  they  would 
be  returned  and  paid  as  one,  based  upon  the  income  for  the  whole 
taxable  year.  Instead  of  this,  they  are  returned  and  paid  sepa- 
rately as  upon  the  incomes  of  different  taxpayers.  There  is  an 
artificiality  about  this  which  makes  one  reluctant  to  take  this  view, 
except  upon  compulsion.  The  tax  Acts,  however,  seem  to  compel 
us  to  take  this  view.  Under  the  doctrine  of  Woodward's  estate, 
the  estate  tax  is  to  be  deducted  in  finding  the  net  taxable  income 
of  the  estate.  The  conclusion  is  reached,  however,  that  it  is  not 
to  be  deducted  in  finding  the  net  taxable  income  of  the  decedent 
who  is  another  taxpayer." 


860  545  U.  S.  TAX  CASES 

CENTRAL  UNION  TRUST  CO.  v.  EDWARDS,  COLLECTOR 

(U.  S.  District  Court,  S.  D.  New  York,  1922) 
(Not  yet  reported) 

Record:  Revenue  Act  of  1916.  Action  to  recover  capital 
stock  tax  paid  under  protest.    Judgment  for  defendant. 

Facts:  In  its  original  capital  stock  tax  return  tlie  plaintiff 
stated  the  par  value  of  its  capital  stock  as  $5,000,000,  its  surplus 
at  $15,000,000,  and  its  undivided  profits  as  $1,968,455.09.  Adding 
these  together  and  taking  the  deduction  allowed  by  law,  a  tax 
was  shown  as  due  in  the  sum  of  $10,934.50.  Under  Exhibit  B  the 
return  showed  that  quotations  upon  the  stock  of  the  company  for 
the  years  1916  and  1917  were  $788.75.  Taking  the  stock  valua- 
tions, the  Commissioner  assessed  an  additional  tax  in  the  sum  of 
$8,734.50.  The  plaintiff  paid  the  additional  tax  and  filed  claim 
for  refund,  contending  that  the  proper  basis  for  the  valuation  of 
its  capital  stock  was  to  add  paid-in  capital,  surplus,  and  undi- 
vided profits,  less  liabilities ;  in  other  words,  the  net  value  of  the 
capital  assets  of  the  corporation  after  deducting  its  debts.  Upon 
an  investigation  the  net  income  for  the  years  1913  to  1916  was 
capitalized  and  a  value  per  share  of  stock  determined  as  $575.97. 
The  claim  for  refund  was  therefore  allowed  in  the  sum  of 
$5,319.50.  Plaintiff  then  brought  suit  to  recover  the  balance  re- 
jected on  a  consideration  of  the  claim  for  refund. 

Questions:  (1)  What  is  the  meaning  of  the  words  "capital 
stock"  as  used  in  the  capital  stock  tax  law? 

(2)  What  is  the  correct  method  of  valuing  capital  stock  for 
the  purposes  of  the  capital  stock  tax  ? 

Decision:  (1)  **The  act  in  question  provides  for  the  annual 
payment  of  'a  special  excise  tax  with  respect  to  the  carrying  on 
or  doing  business  by  such  corporation,  equivalent  to  50c  for  each 
$1,000  of  the  fair  value  of  its  capital  stock  and  in  estimating  the 
value  of  its  capital  stock  the  surplus  and  undivided  profits  shall  be 
included  *  *  *.  The  amount  of  such  annual  tax  shall  in  all 
cases  be  computed  on  the  basis  of  the  fair  average  value  of  the 
capital  stock  for  the  preceding  year.'  The  words  employed  in- 
dicate rather  an  appraisal  of  the  value  of  the  'capital  stock'  ar- 


545  U.  S.  TAX  CASES  861 

rived  at  by  considering  various  factors  of  value,  by  the  exer- 
cise of  judgment;  than  an  auditor's  exact  determination  of  the 
value  of  the  net  worth  of  tangible  assets,  taken  from  the  cor- 
porate books  of  account.  If  the  value  of  good  will  and  fran- 
chises, earnings  and  market  value  of  shares,  are  eliminated  as 
factors  of  value,  then  the  computation  of  value  would  in  no 
sense  be  an  estimation ;  the  value  would  be  the  exact  value  rather 
than  the  fair  value ;  and  it  would  have  been  made  determinable  as 
of  the  end  of  a  fiscal  year;  rather  than  by  'the  fair  average  value 
of  the  capital  stock  for  the  preceding  year. '  ' ' 

(2)  "I  believe  the  collector  was  confronted  with  the  proposi- 
tion of  determining  the  value  of  the  corporation's  business  and 
property  as  an  entirety  and  as  a  going  concern,  and  in  doing  so 
had  the  right  to  look  to  the  net  worth  of  the  corporate  assets,  in- 
cluding its  surplus  and  undivided  profits,  as  shown  by  its  books; 
also  to  the  franchises,  good  will,  outstanding  contracts,  the  earn- 
ing capacity  of  the  corporation  and  the  market  value  of  its  share 
stock  over  the  preceding  year,  and,  after  having  done  so,  was 
authorized  to  arrive  at  a  value  for  its  entire  capital  stock,  repre- 
senting the  enterprise  as  a  going  concern,  according  to  his  best 
judgment;  and  that  the  value,  so  ascertained,  would  be  the  'fair 
average  value  of  the  capital  stock  for  the  preceding  year,'  by 
which  the  tax  by  the  terms  of  the  statute  is  to  be  measured." 

CLARK,  et  al.,  EXECUTORS  v.  BLALOCK,  COLLECTOR 

(U.  S.  District  Court,  N.  D.  of  Ga.,  March  1,  1922) 
(Not  yet  reported) 

Record:  Revenue  Act  of  1916.  At  Law.  Petition  dis- 
missed. 

Facts:  This  case  arises  under  the  estate  tax  provisions  of 
the  Revenue  Act  of  1916  and  involves  the  inclusion  in  the  gross 
estate,  under  Section  202  (b),  of  property  conveyed  by  decedent  in 
1882,  reserving  therein  a  life  estate. 

Question:  Does  the  Revenue  Act  of  1916  include  in  the 
gross  estate  of  a  decedent  transfers  made  by  him  before  the  Act 
went  into  effect? 


862  545  U.  S.  TAX  CASES 

Decision :  This  case  depends  upon  a  question  considered  and 
decided  in  one  way  by  Judge  Rose,  in  Curley  et  al.,  v.  Tate,  Col- 
lector, 276  Fed.  840,  and  decided  in  another  way  by  the  Circuit 
Court  of  Appeals  of  the  Sixth  Circuit  in  Shwab  v.  Doyle,  Collector, 
269  Fed.  321  and  by  Judge  Rudkin  in  Union  Trust  Co.  v.  Wardell, 
Collector,  273  Fed.  733.  I  think  the  weight  of  reason  and  author- 
ity is  with  the  latter  view.  The  power  of  Congress  to  exact  the 
tax,  if  it  did  so  in  fact,  is  not  disputed.  The  whole  question  is 
whether  the  words  "of  which  decedent  has  at  any  time  made  a 
transfer"  were  intended  to  apply  to  transfers  made  before  the 
Act  of  1916  went  into  effect.  Congress,  in  reenacting  the  pro- 
vision, in  1918,  added  in  parenthesis  "whether  said  transfer  or 
trust  is  made  or  created  before  or  after  the  passage  of  this  Act." 
These  words,  while  more  explicit,  are  not  more  comprehensive 
than  those  previously  used,  and  I  think  were  intended  not  to 
change  but  to  make  clear  the  law.  Entertaining  this  view,  the 
petitioners  are  not  entitled  to  recover  and  an  order  will  be 
granted  dismissing  their  petition. 

COLEMAN  V.  UNITED  STATES 

(U.  S.  Supreme  Court,  May  19,  1919) 

(250  U.  S.  30) 

Record :  Act  of  June  13,  1898.  Act  of  July  27,  1912.  Action 
to  recover  taxes  paid.  Appeal  from  Court  of  Claims  which  ren- 
dered judgment  for  defendant  (53  Ct.  Cls.  628).  Judgment  af- 
firmed. 

Facts :  On  May  29,  1903,  the  plaintiff  paid  a  tax  of  $6,721.71 
upon  the  distributive  share  of  the  children  of  Walter  H.  Coleman 
in  his  personal  property.  The  tax  was  paid  under  the  Act  of  June 
13,  1898.  The  later  Act  of  June  27,  1902,  directed  the  refunding 
of  so  much  of  such  taxes  "as  may  have  been  collected  upon 
contingent  beneficial  interests  which  may  not  have  vested  prior 
to  July  1,  1902,"  and  forbade  a  tax  to  be  imposed  upon  such  an 
interest.  The  interest  of  the  children  of  Coleman  was  contingent 
within  the  meaning  of  this  Act,  although  he  died  before  July  1, 
1902.  On  March  17,  1914,  claimants  filed  a  claim  for  refund 
which  was  rejected.     This  suit  was  then  commenced,  on  March  9, 


545  U.  S.  TAX  CASES  863 

1916.  The  Act  of  July  27,  1912,  provided  that  "all  claims  for  the 
refunding  of  any  internal  tax  alleged  to  have  been  erroneously  or 
illegally  assessed  or  collected"  under  the  Act  of  June  13,  1898, 
"or  of  any  sums  alleged  to  have  been  excessive,  or  in  any  manner 
wrongfully  collected  under  the  provisions  of  said  Act  may  be  pre- 
sented to  the  Commissioner  of  Internal  Revenue  on  or  before  the 
first  day  of  January,  nineteen  hundred  and  fourteen,  and  not 
thereafter. ' ' 

Question:  Was  the  plaintiff's  right  to  a  refund  barred  by 
the  Act  of  July  27,  1912? 

Decision:  "The  act  is  entitled  An  Act  Extending  the  time 
for  repayment  of  certain  war  revenue  taxes  erroneously  collected ; 
and  the  claimant  contends  that  the  present  claim  is  not  of  that 
sort,  that  this  tax  having  been  paid  without  protest  or  any  reser- 
vation of  rights,  the  claim  is  only  for  a  bounty  conferred  by  the 
Act  of  1902  and  that  the  benevolence  of  that  act  never  has  been 
withdrawn.  But,  bounty  or  not,  the  direction  in  the  Act  of  1902 
was  on  the  footing  that  the  sums  ordered  to  be  repaid  were  col- 
lected erroneously,  Vanderbilt  v.  Eidman,  196  U.  S.  480,  and  was 
an  order  for  the  refunding  of  a  tax  alleged  to  have  been  errone- 
ously collected.  The  present  tax  had  not  been  collected  when  the 
Act  of  June  27,  1902,  was  passed,  but  was  collected  afterwards 
contrary  to  its  terms.  There  was  little  bounty  in  its  application 
to  such  a  case.  No  argument  can  make  it  plainer  than  do  the 
words  themselves  that  the  Act  of  1912  applies  to  the  present  claim, 
and  that  it  was  presented  too  late." 

COMMERCIAL  HEALTH  &  ACCIDENT  CO.  v. 
PICKERING,  COLLECTOR 

(U.  S.  District  Court,  S.  D.  of  lUinois,  S.  D.) 
(281  Fed.  539) 

Record :  Revenue  Acts  of  1917  and  1918.  Action  to  recover 
taxes  paid  under  protest.     Judgment  for  defendant. 

Facts :  The  plaintiff,  a  mutual  life,  health  and  accident  insur- 
ance company,  based  its  action  upon  the  theory  that  it  comes  within 
the  exempted  class  specified  in  paragraph  10,  section  11,  Title  I  of 


864  545  U.  S.  TAX  CASES 

the  Act  of  1916,  which  was  reenacted  in  the  Acts  of  1917  and  1918. 
Paragraph  10  is  as  follows: 

"Farmers'  or  other  mutual  hail,  cyclone,  or  fire  insurance 
companies,  mutual  ditch  or  irrigation  companies,  mutual  or  co- 
operative telephone  companies,  or  like  organizations  of  a  purely  lo- 
cal character,  the  income  of  which  consists  solely  of  assessments, 
dues,  and  fees  collected  from  members  for  the  sole  purpose  of  meet- 
ing its  expenses. ' ' 

Questions:  (1)  Should  the  exemption  proviso  of  a  revenue 
law  be  liberally  or  strictly  construed  ? 

(2)  Do  the  words  in  the  exemption  proviso  "of  a  purely  local 
character ' '  limit  only  the  proviso  *  *  or  like  organizations  "  or  do  they 
limit  all  of  the  enumerated  companies  set  out  in  the  paragraph  ? 

(3)  Is  the  plaintiff  "a  like  organization  of  a  purely  local  char- 
acter" within  the  meaning  of  the  statute? 

Decision:  (1)  "A  claim  of  exemption  from  taxation  must  be 
clearly  made  out."  The  court  followed  the  rule  laid  down  in 
United  States  v.  Dickson,  15  Fed.  141,  to  the  effect  that  an  exemp- 
tion proviso  must  be  strictly  construed. 

(2)  "We  do  not  believe  it  was  the  intention  to  exempt  'farm- 
ers' or  other  mutual  hail,  cyclone,  or  fire  insurance  companies,'  etc., 
generally,  but  only  such  as  are  'of  a  purely  local  character';  nor 
mutual  or  co-operative  telephone  companies,  generally,  but  only 
such  as  are  purely  local  in  their  character.  In  other  words,  we  do 
not  feel  that  the  words  'of  a  purely  local  character'  are  words  of 
limitation  only  upon  the  provision  'or  like  organizations,'  but 
rather  upon  all  of  the  especially  enumerated  businesses  set  out  in 
the  entire  paragraph.  A  proper  reading  of  this  paragraph  re- 
quires the  interpolation  of  a  comma  after  the  words  'like  organi- 
zations.' " 

(3)  "At  the  time  of  the  enactment  of  these  laws  'farmers'  or 
other  mutual  *  •  *  companies  *  *  *  telephone  compan- 
ies,' or  the  like,  'of  a  purely  local  character'  were  numerous  and 
the  mere  naming  of  one  of  them  was  its  most  perfect  description, 
which  was  well  known  and  fully  understood  to  mean  a  local  mutual 
telephone  company,  such  as  a  farmers'  party  line  with  its  little  ex- 
change; neighborhood  anti-horse  thief  societies;  the  local  farmers' 


545  U.  S.  TAX  CASES  865 

insurance  societies,  and  the  like.  Such  expressions  did  not  include  a 
general  life,  health  and  accident  insurance  company  organized  un- 
der a  general  law  and  doing  a  general  business  throughout  an  entire 
State — such  a  concern  as  the  plaintiff,  with  general  offices  in  Spring- 
field, and  subordinate  headquarters  in  Chicago,  Decatur,  and  East 
St.  Louis,  and  this,  even  though  at  the  time  of  the  filing  of  the  dec- 
laration herein  the  plaintiff  had  done  no  business  outside  the  geo- 
graphical limits  of  the  State." 

CONGDON  V.  LYNCH 

(U.  S.  District  Court,  Minnesota,  Third  Division,  March  13,  1922) 

(Not  yet  reported) 

Eecord:  Kevenue  Act  of  1916.  Action  at  law  to  recover 
federal  estate  taxes  paid  under  protest.    Judgment  for  plaintiff. 

Facts :  On  August  3,  1916,  Chester  A.  Congdon  entered  into 
a  trust  agreement  with  his  wife  and  children  as  trustees.  The 
property  conveyed  in  this  agreement  consisted  largely  of  interests 
in  mines  and  mineral  land  and  in  the  securities  of  corporations 
owning  mines  and  mineral  lands.  Provision  was  made  for  the 
distribution  of  the  income  from  the  trust  property  to  the  wife  and 
children.  Article  10  of  the  trust  agreement  provided  as  follows : 
'  *  The  donor  reserves  the  right  at  any  time  and  from  time  to  time : 
(a)  to  change  the  beneficiaries  hereunder  and  their  respective  in- 
terests in  the  trust  estate  and  the  income  therefrom;  (b)  to  change 
the  trustees  hereunder  and  the  number  thereof;  (c)  to  modify  the 
period  of  the  trust;  (d)  to  change  the  disposition  of  the  trust 
fund  at  the  expiration  of  the  trust  period;  (e)  to  change  the  dis- 
position of  the  trust  fund  in  the  event  of  the  death  of  all  the  bene- 
ficiaries and  their  issue  during  the  life  of  the  donor;  (f)  to  with- 
draw from  this  indenture  of  trust  the  power  of  the  trustees  to 
take,  hold  and  dispose  of  hereunder  any  real  property  not  there- 
tofore acquired  by  them;  (g)  to  modify  the  percentage  of  capital 
assets,  or  the  principal  of  the  trust  fund,  which,  by  the  provisions 
of  Article  3,  the  trustees  are  permitted  to  treat  as  income,  and  to 
modify  or  vsdthdraw  the  discretion  committed  to  the  trustees 
touching  the  same.  Nothing  in  this  article  contained  shall  be 
deemed  to  reserve  in  the  donor  any  right  or  power  to  make  him- 


866  545  U.  S.  TAX  CASES 

self  a  beneficiary  hereunder  nor  to  give  him  any  benefit  of  this 
trust."  The  securities  were  handed  over  to  the  trustees,  who 
accepted  the  same,  and  the  income  beneficiaries  received  the  bene- 
fits. Congdon  died  on  November  21,  1916,  without  having  made 
any  changes  in  the  terms  of  the  trust.  For  the  purpose  of  the 
federal  estate  tax,  plaintiffs  were  required  to  include  in  the  gross 
estate,  the  entire  trust  property,  on  the  theory  that  it  came  within 
Section  202  (b)  of  the  statute,  and  that  it  was  property  "with  re- 
spect to  which  the  decedent  had  created  a  trust  *  *  *  intended  to 
take  effect  in  possession  or  enjoyment  at  or  after  his  death."  The 
plaintiff  had  also  been  required  to  include  in  gross  estate  the  en- 
tire amount  of  the  certificates  of  deposit  issued  by  certain  banks 
in  1913  and  1914,  and  payable  to  the  order  of  the  decedent  and 
his  wife,  or  either  of  them,  or  both,  or  the  survivor.  These  cer- 
tificates of  deposit  had,  at  all  times,  since  their  issuance,  been  in 
possession  of  the  widow.  The  Commissioner  also  disallowed  cer- 
tain deductions  claimed  on  the  plaintiff's  estate  tax  return  for 
amounts  expended  by  the  executors  for  repairs  and  upkeep  of 
buildings  belonging  to  the  estate  and  for  fire  insurance  on  such 
buildings. 

Questions:  (1)  Was  the  transfer  in  question  a  trust  in- 
tended to  take  effect  in  possession  or  enjoyment  at  or  after  death, 
so  as  to  be  required  to  be  included  in  the  gross  estate! 

(2)  What  part,  if  any,  of  the  joint  bank  deposit  was  prop- 
erly a  part  of  the  gross  estate? 

(3)  Were  the  expenses  paid  by  the  executors  proper  deduc- 
tions from  the  gross  estate? 

Decision:  (1)  "It  would  seem  to  be  deducible  from  the  au- 
thorities cited  that  the  words  'take  effect  in  possession  or  enjoy- 
ment at  or  after  the  death '  of  the  donor  include  within  their  scope 
a  postponement  of  complete  possession  or  complete  enjoyment, 
by  reason  of  (a)  a  prior  life  estate  in  the  donor;  of  (b)  a  prior 
estate  in  a  third  person  during  the  life  of  the  donor;  of  (c)  a  re- 
served power  in  the  donor  to  defeat  the  substantial  rights  under 
the  trust,  coupled  with  a  power  of  control  over  the  management 
and  disposition  of  the  trust  estate.  *  *  *  In  determining 
what  right  of  control  and  disposition  the  donor  reserved  to  him- 


545  U.  S.  TAX  CASES  867 

self,  it  is  proper  to  consider  all  of  the  reserved  rights,  together  as 
well  as  separately.  When  this  is  done,  it  is  hard  to  conceive  any 
right  of  management,  control  or  disposition  which  the  donor  did 
not  have,  except  the  right  to  make  himself  a  beneficiary  of  the 
trust,  and  except,  possibly,  also  the  right  to  revest  the  property 
in  himself,  and  even  this  latter  result  was  possible  under  the 
terms  of  the  trust  instrument.  These  reserved  rights  in  the  donor, 
numerous,  far-reaching,  earefullj^'-worded,  together  with  the  im- 
portant fact  that  the  donor  was  one  of  the  trustees,  the  others 
being  his  wife  and  children,  all  indicate,  unless  they  are  mean- 
ingless, an  intention  on  the  part  of  the  donor  to  retain  during  his 
lifetime  control  in  management  and  power  of  final  disposition  of 
the  property  forming  the  trust  estate.  In  other  words,  until  the 
death  of  the  donor,  there  is  as  was  held  in  the  matter  of  Dana 
Company,  215  New  York  461,  *no  element  of  finality'  about  the 
trust.  At  the  death  of  the  donor  all  of  these  reserved  rights 
would  of  course  cease.  The  status  of  the  remaining  trustees  is  then 
changed ;  they  are  freed  from  the  control  of  the  donor.  The  estate 
they  hold  is  also  freed  from  the  right  in  the  donor  to  change 
or  destroy  it.  In  other  words,  freed  from  what  in  effect  was  an 
encumbrance.  Eights  of  the  income  beneficiaries  also  change 
character  at  the  death  of  the  donor, — their  rights  cease  to  be  de- 
pendent upon  the  will  and  conduct  of  the  donor,  and  become  for 
the  first  time  absolute  in  possession  and  enjoyment.  And  if  at 
the  death  of  the  donor  there  be  then  alive  any  presumptive  bene- 
ficiaries of  the  corpus  of  the  estate,  their  contingent  right  be- 
comes for  the  first  time  independent  of  the  will  and  conduct  of  the 
donor.  *  *  *  In  view  of  the  rights  reserved  to  the  donor  in 
the  trust  instrument,  some  of  which  are  tantamount  to  a  power 
of  revocation,  so  far  at  least  as  the  beneficiaries  are  concerned, 
others  of  which  enable  the  donor  to  keep  a  firm  hold  on  the  man- 
agement, control  and  disposition  of  the  trust  estate  during  his 
life,  I  am  forced  to  the  conclusion  that  the  trust  was  one  intended 
to  take  effect  in  possession  or  enjoyment  at  or  after  the  death  of 
the  donor,  and  therefore  within  the  provision  of  Section  202(b) 
of  the  Estate  Tax  Act." 


868  545  U.  S.  TAX  CASES 

(2)  "There  is  a  statute  in  the  State  of  New  York,  Section 
220  of  the  Tax  Laws  (Consolidated  Laws,  Chapter  60,  subdivision 
7),  which  reads  as  follows:  *  *  *  Under  this  statute  it  has 
been  held  that  the  property  so  deposited  was  taxable  to  the  ex- 
tent of  one-half  of  its  value  'on  the  theory  that  a  joint  owner  of 
personal  property  may  dispose  of  his  own  interest  during  his  life- 
time, and  that  the  doctrine  of  survivorship  applies  only  if  the 
jointure  is  not  thus  severed,  and  that  therefore  the  absolute  own- 
ership of  the  undivided  one-half  of  the  joint  property  which  the 
deceased  joint  owner  might  have  disposed  of  passed  to  the  sur- 
vivor upon  his  death  and  not  until  then.  *  *  •  That  the 
surviving  joint  tenant  has  at  all  times  been  the  owner  of  an  undi- 
vided one-half  interest,  subject  to  the  right  of  his  co-tenant  to  take 
by  survivorship,  and  that  therefore  that  undivided  interest  was 
not  taxable,  but  that  the  survivor  succeeds  to  the  absolute  own- 
ership of  the  other  undivided  one-half  interest  only  by  and  upon 
the  death  of  his  co-tenant,  and  that  therefore  such  interest  is 
taxable.'  In  view  of  the  similarity  of  the  provisions  of  the  New 
York  statute  and  of  the  federal  estate  tax  act,  and  in  view  of 
the  foregoing  construction  of  the  New  York  statute  given  by  its 
courts,  I  am  of  the  opinion  that  one-half  only  of  the  funds  repre- 
sented by  the  certificates  of  deposit  above  mentioned  should  be 
included  in  the  gross  estate  of  Chester  A.  Congdon." 

(3)  "These  expenditures  were  clearly  authorized  by  Sections 
7296  and  7298  General  Statutes  Minnesota,  1913.  The  items  were 
included  in  the  final  account  of  the  executors  rendered  to  the  pro- 
bate court  of  St.  Louis  County,  Minn.,  and  were  allowed  by  that 
court  as  proper  items.  *  *  «  Section  203  of  the  Federal 
Estate  Tax  Act  provides  for  deductions  of  'administration  ex- 
penses •  *  *  and  such  other  charges  against  the  estate  as 
are  allowed  by  the  laws  of  the  jurisdiction. '  I  am  clearly  of  the 
opinion  that  these  two  items  should  have  been  allowed  as  deduc- 
tions from  the  gross  estate." 


545  U.  S.  TAX  CASES  869 

COTHKAN  &  CONNALLY  v.  UNITED  STATES 

(U.  S.  District  Court,  W.  D.  Virginia,  Oct.  6,  1921) 
(276  Fed.  48) 

Record :  Revenue  Act  of  1918.  This  is  a  proceeding  against 
the  United  States,  brought  under  subsection  20  of  Section  24, 
Judicial  Code,  and  Sections  4,  5,  6,  7,  and  10,  of  the  Tucker  Act 
(24  Stat,  505-507).  The  ground  of  action  was  that  the  petitioners 
had  been  required  to  pay,  under  duress  and  after  protest,  a  special 
tax  on  brokers  under  Section  1001  (1)  of  the  Revenue  Act  of  1918. 
Judgment  for  defendant. 

Facts :  Petitioners  were  engaged  in  the  business  of  tobacco 
warehousemen.  Leaf  tobacco  was  brought  by  growers  to  the 
warehouse  of  petitioners  where  it  was  displayed  for  sale.  Sub- 
ject, usually,  to  right  of  rejection  on  the  part  of  the  grower,  at 
prescribed  times  the  warehousemen  held  auction  sales  of  the  to- 
bacco. Petitioners  had  arranged  with  the  principal  manufactur- 
ers of  tobacco  to  have  buyers  assemble  at  the  warehouse  for  these 
sales.  The  highest  bidder  for  each  pile  became  the  purchaser 
thereof,  unless  such  bid  was  rejected.  If  the  bid  was  not  re- 
jected, the  warehousemen,  promptly  after  the  conclusion  of  the 
sale,  paid  the  grower  the  bid  price  of  the  tobacco,  less  a  commis- 
sion. Later  on  the  warehousemen  collected  the  purchase  price 
from  the  successful  bidder.  The  buyers  and  sellers  were  not  usu- 
ally brought  into  personal  contact ;  the  seller  looked  to  the  ware- 
housemen for  his  share  of  the  selling  price,  and  the  warehousemen 
looked  to  the  buyer  to  pay  for  the  tobacco.  Section  1001  (1)  of 
the  Revenue  Act  of  1918  provides  as  follows:  "Brokers  shall 
pay  $50,  Every  person  whose  business  it  is  to  negotiate  pur- 
chases or  sales  of  stock,  bonds,  exchange,  bouUion,  coined  money, 
bank  notes,  promissory  notes,  other  securities,  produce  or  mer- 
chandise, for  others,  shall  be  regarded  as  a  broker    *     *     *." 

Question :  Were  the  petitioners  * '  brokers ' '  within  the  mean- 
ing of  the  statute  and  so  subject  to  special  tax? 

Decision:  "Where  a  statute  defines  the  meaning  of  a  word  it 
is  clearly  improper  to  seek  to  give  such  word  a  different  mean- 
ing.   The  word  'broker'  as  used  in  subsection  1  of  Section  1001  of 


870  545  U.  S.  TAX  CASES 

the  Revenue  Act  of  1918  (40  Stat.  1057, 1126),  is  defined  in  this  sec- 
tion. One  of  the  common  meanings  of  the  word  'negotiate,'  found 
in  the  Century  Dictionary  and  in  "Webster 's  Dictionary,  is  *  to  bring 
about  by  mutual  arrangement.'  The  evidence  in  this  case  shows 
that  the  very  essence  of  the  business  of  the  petitioners  was  to 
arrange  that  tobacco  planters  should  bring  their  product  to  peti- 
tioners' warehouse  to  be  sold  at  auction,  and  that  tobacco  buyers 
should  attend  such  auction  sales  and  bid  for  the  tobacco.  The 
petitioners  clearly  brought  about  sales  of  tobacco  by  mutual  ar- 
rangement.    •     •     * 

"In  this  same  subsection  stock  brokers  are  included.  It  is 
matter  of  common  knowledge  that  the  stockbroker,  commissioned 
or  directed  to  sell  shares  of  stock,  frequently,  if  not  usually,  gets 
the  stock  certificate  (indorsed  in  blank)  from  the  seller,  and  then 
finds  a  purchaser,  and  frequently  the  seller  does  not  know  who 
the  purchaser  is.  So,  also,  in  case  a  stock  or  bond  broker  is  di- 
rected to  buy.  In  all  cases  the  stock  or  bond  broker  negotiates 
sales  and  purchases  because  he  brings  them  about  by  mutual  ar- 
rangement. It  is  true  that  in  some  brokerage  businesses  it  is 
usual  for  the  broker,  as  in  real  estate  brokerage,  to  bring  the 
buyer  and  seller  together.  But  the  definition  of  broker  in  this 
statute  is  much  too  comprehensive  to  make  it  permissible  to  re- 
strict the  word  to  cases  in  which  the  broker  affects  the  sale  by 
bringing  the  seller  and  buyer  together."     *     *     * 

The  fact  that  the  Revenue  Act  of  1918  repealed  Section  35  of 
the  Act  of  August  5,  1909,  which  imposed  a  tax  on  dealers  in  leaf 
tobacco,  and  then  inserted  in  subsection  1  of  Section  1001  the 
words  "produce  or  merchandise"  seems  to  make  quite  clear  the 
intent  to  subject  tobacco  warehousemen  to  the  brokers'  tax,  in 
lieu  of  the  former  tax  on  dealers  in  leaf  tobacco. 

Accordingly,  the  court  concluded  that  the  petitioners  were 
subject  to  the  tax  in  question  and  entered  judgment  in  favor  of 
the  defendant. 


545  U.  S.  TAX  CASES  871 

CURLEY,  et  al.  v.  TAIT,  COLLECTOR 

(U.  S.  District  Court,  D.  Maryland,  Nov.  29,  1921) 

(276  Fed.  840) 

Record :  Revenue  Act  of  1916.  Action  by  executors  of  the 
will  of  William  H.  Grafflin  to  recover  federal  estate  tax  paid  un- 
der protest.  On  demurrer  to  declaration.  Overruled.  See  also 
276  Fed.  845,  post. 

Facts:  The  decedent,  Grafflin,  about  seven  and  one-half 
years  before  his  death  transferred  at  different  times  various  se- 
curities to  either  the  Johns  Hopkins  Hospital  or  the  Johns  Hop- 
kins University.  As  neither  institution  was,  in  the  view  of  the 
Government,  to  get  any  substantial  benefit  from  the  property 
until  after  the  testator's  death,  the  defendant  says  that  the  trans- 
fers were  not  intended  to  take  effect  until  that  time  and  that,  in 
consequence,  the  tax  was  properly  collected.  There  were  vari- 
ous minor  differences  in  the  forms  of  the  transfers,  but  they  were 
all  alike,  in  that  by  each  of  them  an  out  and  out  gift  of  the  se- 
curities was  made  and  consummated  by  the  issue  and  delivery  of 
new  certificates  in  the  name  of  the  grantee.  The  Hospital,  or 
the  University,  as  the  case  might  be,  covenanted,  in  each  of  three 
agreements  of  transfer,  that  it  would  pay  the  net  income  during 
Grafflin 's  life  to  him,  and  after  his  death,  during  such  time  as  his 
wife  should  survive  him,  to  her.  After  both  of  them  were  gone, 
the  income,  as  well  as  the  principal,  was  to  be  applied  to  the  use 
of  the  grantee.  The  remaining  one  of  the  four,  was  in  the  nature 
of  a  marriage  settlement.  It  recited  that  Graffln  was  about  to  be 
married,  and  the  Hospital,  with  whom  this  particular  agreement 
was  made,  covenanted  to  pay,  after  the  marriage  was  solem- 
nized, the  net  income  to  the  wife  during  her  life,  and  afterwards  to 
him  during  his  life,  if  he  should  prove  to  be  the  survivor. 

Questions:  (1)  Assuming  that  neither  the  University  nor 
Hospital  enjoyed  their  gifts  during  Grafflin 's  lifetime,  and  also  as- 
suming that  the  statute  is  retroactive  and  covers  these  transac- 
tions entered  into  years  before  it  was  enacted,  was  the  defendant 
justified  in  requiring  the  payment  of  the  tax  upon  the  full  value 
of  the  stock  transferred  in  contemplation  of  Grafflin 's  marriage 
to  the  Hospital  ? 


872  545  U.  S.  TAX  CASES 

(2)  Is  the  statute  retroactive  so  as  to  include  transfers  which 
were  all  made  before  the  statute  was  enacted? 

Decision:  (1)  "If  all  beneficial  ownership  and  possession 
irrevocably  passes  from  the  transferror  at  the  time  of  the  trans- 
fer, it  would  seem  to  be  immaterial  whether  it  goes  to  one  person 
or  to  several,  and,  if  to  several,  whether  their  enjoyment  is  to  be 
simultaneous  or  successive,  and,  if  the  latter,  at  what  time  or  upon 
the  happening  of  what  event  the  rights  of  one  give  place  to  those 
of  another.  In  the  instant  case,  had  the  agreement  provided  that 
after  Mrs.  Grafflin's  death,  and  during  any  period  he  survived 
her,  the  income  should  be  paid  to  some  one  other  than  himseK, 
there  could,  I  imagine,  have  been  no  claim  that  any  estate  tax  was 
chargeable.  It  follows  that  all  that  is  taxable,  if  anything,  is,  in 
the  language  of  the  statute,  'the  interest'  which  he  retained  for 
himself."     *     *     • 

"The  question  of  how  such  a  contingent  interest  as  Grafflin 
retained  for  himself  under  this  agreement  should  be  valued  for 
estate  tax  purposes  is  not  at  all  clear.  Apparently  what  the  stat- 
ute had  in  mind  in  declaring  that  the  value  of  the  gross  estate  of 
the  decedent  shall  be  determined  by  including  the  value  at  the 
time  of  his  death,  of  all  property,  etc.,  is  what  it  said,  and  no 
more.  That  is  to  say,  the  value  of  the  property  is  to  be  then  de- 
termined as  of  that  date  and  not  his  interest  in  it ;  for,  if  the  latter 
were  the  case,  any  property  which  had  been  transferred  by  him  in 
such  manner  that  his  interest  ceased  at  death  would  have  no  tax- 
able value,  and  that  is  clearly  what  the  statute  does  not  mean." 

(2)  Upon  the  other  question,  that  no  tax  at  all  was  collectible 
because  the  transfers  here  in  controversy  were  all  made  before 
the  statute  was  enacted,  the  Government  contends  the  statute  it- 
self declares  that  it  has  reference  to  a  transfer  made  "at  any 
time."  The  rule,  of  course,  is  that  statutes  are  not  to  be  given 
a  retroactive  construction  when  by  doing  so  "antecedent  rights 
are  affected  or  human  conduct  given  a  consequence  which  it  did 
not  intend."  This  statute,  if  retroactively  applied,  wiU,  in  some 
instances  cause  serious  hardship  and  injustice.  If  the  Govern- 
ment's contention  be  sustained,  the  tax  will  come,  not  out  of  the 
sum  received  by  the  one  to  whom  the  tax  property  passes,  but  will 


545  U.  S.  TAX  CASES  873 

be  collected  from  one  to  whom  it  does  not.  Neither  the  Johns 
Hopkins  Hospital  nor  the  Johns  Hopkins  University  will  pay  one 
cent  of  it.  It  will  all  come  out  of  the  property  going  to  Grafiflin's 
widow.  It  is  easy  to  conceive  of  a  case  in  which  the  taxes  on 
the  transferred  property  might  amount  to  more  than  the  residue 
of  the  estate,  large  as  the  testator  had  every  reason  to  suppose  it 
would  be,  and  the  Supreme  Court  has  held  that  the  courts  will 
not  assume  that  Congress  intended  any  such  consequences. 

It  was,  therefore,  held  that  the  Act  of  1916  did  not  affect 
transfers  made  before  it  was  passed. 

CURLEY  et  al.  v.  TAIT,  COLLECTOR 

(U.  S.  District  Court,  D.  Maryland,  Nov.  29,  1921) 
(276  Fed.  845) 

Record :  Revenue  Act  of  1916.  Action  by  executors  of  estate 
of  Helen  N.  Grafflin,  deceased,  to  recover  federal  estate  tax  paid 
under  protest.  On  demurrer  to  declaration.  Overruled.  See, 
also,  276  Fed.  840,  ante. 

Facts:  The  plaintiffs,  as  executors,  brought  this  suit  to  re- 
cover $3,443.07,  which  is  the  amount  of  estate  tax  the  defendant 
exacted  from  them  in  excess  of  what  they  should  have  paid  had 
the  Maryland  collateral  inheritance  tax  of  $58,759.44  been  de- 
ducted before  ascertaining  the  amount  of  the  estate  liable  to  the 
federal  levy. 

Question:  Does  the  Maryland  collateral  inheritance  tax  at- 
tach to  an  estate  before  distribution? 

Decision:  If  the  inheritance  tax  in  question  does  attach  to 
the  estate  before  distribution  the  plaintiffs  were  entitled  to  deduct 
the  amount  thereof  before  ascertaining  the  value  of  the  estate 
liable  to  the  federal  tax.  On  the  other  hand,  if  the  Maryland  tax 
is  upon  the  individual  beneficiaries  of  the  testatrix's  bounty,  the 
sum  here  in  controversy  was  properly  collected.  The  Circuit 
Court  of  Appeals  for  the  Third  Circuit  has  held  that  the  Supreme 
Court  of  Pennsylvania  has  interpreted  the  statute  of  that  state 
as  imposing  a  tax  upon  the  estate  before  distribution.  Lederer, 
Collector  v.  Northern  Trust  Co.,  262  Fed.  52.     The  General  As- 


874  545  U.  S.  TAX  CASES 

sembly  of  Maryland  in  1844  copied  and  enacted  the  Pennsylvania 
statute,  making  such  changes  in  the  verbiage,  and  apparently 
only  such  as  were  necessary  to  adapt  it  to  the  difference  between 
the  probate  machinery  of  the  two  commonwealths. 

It  follows  that,  as  the  instant  case,  is  ruled  by  Lederer  v. 
Northern  Trust  Co.,  supra,  defendant's  demurrer  to  plaintiff's 
declaration  must  be  overruled. 

DAYTON  BRASS  CASTINGS  CO.  v.  GILLIGAN,  COLLECTOR 

(U.  S.  Circuit  Court  of  Appeals,  Sixth  Cir.,  Dec.  15,  1921) 
(277  Fed.  227) 

Record:  "War  Munitions  Act  of  September  8,  1916.  Action 
to  recover  tax  paid  under  protest.  For  case  below  see  267  Fed. 
872,  ante  168.    Affirmed. 

Facts:  In  May,  1915,  the  Canadian  Car  and  Foundry  Com- 
pany had  a  contract  for  the  sale  of  shrapnel  shells  to,  or  for  the 
use  of,  the  Russian  Government,  and  had  sublet,  to  a  machine  com- 
pany at  Dayton,  a  contract  for  making  the  fuses  which  were  to 
be  parts  of  the  completed  shells.  The  machine  company  then 
entered  into  a  contract  with  the  Dayton  Brass  Castings  Company 
by  which  the  castings  company  was  to  receive  from  the  machine 
company  brass  ingots  and  put  the  same  through  its  foundry, 
moulding  the  same  into  small  castings,  which  were  by  the  machine 
company  to  be  united  with  other  parts  to  complete  a  fuse.  For 
this  service  the  castings  company  was  to  receive  a  specified  price 
per  pound.  This  contract  was  carried  on  during  the  year  1916. 
By  the  provisions  of  the  above  named  act,  a  tax  was  imposed 
upon  every  person  manufacturing  (among  other  things)  "any 
part  of"  fuses,  the  tax  to  be  12^/^  per  cent  of  the  entire  net  profits 
actually  received  or  accrued  during  the  year  "from  the  sale  or  dis- 
position of  such  articles"  manufactured  within  the  United  States. 

Question:  "The  plaintiff's  present  contention  is  that  the 
plaintiff  did  not  receive  profit  *  from  the  sale  or  disposition  of  such 
articles,'  but  was  in  effect  only  paid  for  work  and  labor  expended 
on  the  property  of  another. ' ' 


545  U.  S.  TAX  CASES  875 

Decision:  While  the  plaintiff  did  not  make  a  sale  of  the 
castings  it  is  clear  that  it  did  make  a  disposition  of  these  articles 
within  the  meaning  of  the  statute.  "Having  received  the  metal 
and  having  cast  it  into  form,  plaintiff  disposed  of  the  castings 
and  so  far  disposed  of  the  subject-matter  of  the  contract  as  to  turn 
these  articles  over  to  the  machine  company  and  get  its  pay  there- 
for. It  cannot  be  questioned  that  what  plaintiff  did  amounted  to 
a  'disposition'  of  the  articles  within  common  dictionary  defini- 
tions of  that  word.  The  substantial  contention  is  that  under  the 
doctrine  of  ejusdem  generis  the  statutory  phrase  can  only  include 
dispositions  of  the  character  of  a  sale.  This  rule  may  not  pre- 
vail to  the  exclusion  of  the  other  rule  which  requires  every  word 
and  phrase  to  be  given  force  and  meaning,  if  possible;  and  no 
reasonably  probable  course  of  conduct  by  manufacturers  has  oc- 
curred to  us  or  been  suggested  by  counsel  which  would  not  be  a  sale 
and  yet  would  be  the  'disposition'  contemplated  by  this  statute,  if 
this  conduct  by  this  plaintiff  should  not  so  be  named.  *  •  • 
Every  reason  which  would  justify  taxing  a  sale  seems  to  justify 
a  tax  reaching  this  '  disposition, '  and  Congress  could  not  well  have 
chosen  a  more  completely  inclusive  term." 

DAYTON  BRONZE  BEARING  CO.  v.  GILLIGAN,  COLLECTOR 
(U.  S.  Circuit  Court  of  Appeals,  Sixth  Cir.,  June  6,  1922) 

(281  Fed.  709) 
Record:    R.  S.  3176  as  amended  by  Revenue  Act  of  1916. 
Action  to  recover  penalty  alleged  to  have  been  illegally  collected. 
In  error  to  U.  S.  District  Court,  Northern  District,  Ohio,  which 
rendered  judgment  for  the  plaintiff.    Judgment  affirmed. 

Facts :  Pursuant  to  a  contract  entered  into  between  the  Day- 
ton Bronze  Bearing  Co.  plaintiff  herein,  and  the  Recording  &  Com- 
puting Machine  Co.,  the  plaintiff  agreed  to  mold  material  furnished 
and  owned  by  the  Recording  Co.  into  certain  rough  and  prelimi- 
nary forms,  in  which  forms  they  were  to  be  returned  to  the  Record- 
ing company  as  eastings.  These  castings  were  in  turn  used  by  the 
Recording  company  in  the  manufacture  of  fuses  to  be  attached  to 
shells  manufactured  by  other  persons  or  corporations  for  the  use  of 
the  Russian  Government.    The  plaintiff  believed  in  good  faith  that 


876  545  U.  S.  TAX  CASES 

it  was  not  manufacturing  munitions  and  not  liable  to  the  payment 
of  any  tax  under  the  Munitions  Tax  Act  of  December  8,  1916,  and 
for  this  reason,  it  failed  to  make  and  file  a  return  within  the  time 
prescribed  by  law.  It  further  appeared  that  the  plaintiff  had  been 
advised  by  reputable  counsel  that  under  the  facts  stated  it  was  not 
liable  for  the  payment  of  this  tax.  On  July  2,  1917,  a  revenue  agent 
caUed  at  the  office  of  the  plaintiff  and  requested  it  to  file  with  the 
Collector  a  return  covering  its  profits  under  the  contract  above 
mentioned.  Since  the  plaintiff  objected  to  doing  this,  and  still 
insisted  that  it  was  not  liable  for  the  payment  of  this  tax,  the  col- 
lector of  internal  revenue  advised  that  a  return  be  filed  under  pro- 
test without  prejudice  to  the  company's  rights,  and  acting  upon 
this  advice,  the  plaintiff  did,  on  the  13th  day  of  July,  1917,  file  such 
report  with  the  collector  and  thereupon  the  Commissioner,  on 
August  23,  1917,  assessed  a  tax  against  the  company,  together  with 
50%  penalty  for  failure  to  file  the  same  the  1st  day  of  March,  1917, 
as  required  by  law.  The  liability  for  the  tax  is  not  questioned,  this 
point  having  been  settled  by  the  case  of  Dayton  Brass  Castings  Co. 
V.  Gilligan,  267  Fed.  872,  ante  168,  which  case  did  not,  however, 
involve  the  50%  penalty  here  sought  to  be  recovered,  for  the  reason 
that  the  collector  voluntarily  returned  the  penalty  assessed  and 
collected  in  that  case  to  the  plaintiff  before  the  commencement  of 
that  action. 

Questions :  (1)  Was  the  failure  of  the  plaintiff  to  file  a  return 
within  the  time  prescribed  by  law  "due  to  a  reasonable  cause  and 
not  to  wilful  neglect, ' '  within  the  meaning  of  the  exception  in  Sec- 
tion 3176  R.  S.  as  amended  by  the  Revenue  Act  of  1916,  so  as  not 
to  be  liable  for  the  50%  penalty  provided  for  in  that  Section? 

(2)  Was  the  return  filed  'voluntarily  and  without  notice  from 
the  collector'  within  the  meaning  of  the  clause  in  Section  3176  pro- 
viding for  exemption  from  liability  for  the  50%  penalty? 

(3)  What  weight  is  to  be  given  to  the  fact  that  a  penalty  col- 
lected in  a  similar  case  was  voluntarily  returned  by  the  collector  ? 

Decision:  (1)  **The  attendant  and  surrounding  circum- 
stances of  this  case  have  no  tendency  whatever  to  cast  a  doubt  or 
suspicion  upon  the  good  faith  of  the  taxpayer.  While  the  fact  that 
it  sought  and  obtained  legal  advice,  in  and  of  itself,  might  ncrt  be 


545  U.  S.  TAX  CASES  877 

sufficient  to  excuse  its  failure  to  file  this  return,  nevertheless  it 
tends  to  show  that  the  taxpayer  was  acting  in  good  faith  and  availed 
itself  of  the  best  means  at  its  command  to  determine,  honestly  and 
fairly,  the  question  of  its  liability.  *  *  *  It  would  therefore 
appear  that  the  officers  of  this  company  were  honestly  mistaken  as 
to  its  liability  to  pay  this  tax  and  that  under  the  order  of  the  Treas- 
ury Department  above  referred  to  [0.  818,  3-19-204,  1919  Cum. 
Bull.  p.  247]  in  the  absence  of  circumstances  having  a  tendency  to 
cast  doubt  and  suspicion  upon  its  good  faith,  its  ignorance  of  its 
liability  to  pay  this  tax  is  sufficient  to  constitute  a  reasonable  cause 
for  failure  to  make  and  file  a  return  within  the  time  prescribed  by 
law." 

(2)  "Counsel  has  not  called  our  attention  to  any  statute  pro- 
viding for  a  notice  to  the  taxpayer  to  file  a  return,  nor  does  there 
appear  to  be  any  statutory  provision  for  a  notice  of  this  character 
except  as  found  in  Section  3173  R.  S.  or  in  Section  306  of  the  Muni- 
tions Act  of  1916.  *  *  *  No  such  notice  as  provided  in  either  of 
these  sections  was  given  the  Dayton  Bronze  Bearing  Co.  by  the  col- 
lector or  deputy  collector.  "While  the  petition  avers  that  the  plain- 
tiff was  notified  by  an  agent  of  the  internal  revenue  department  to 
file  a  return  with  the  collector,  nevertheless  the  evidence  and  stipula- 
tion in  reference  thereto  are  to  the  effect  that  the  agent  of  the 
Internal  Revenue  Department,  in  discharge  of  the  duties  imposed 
upon  him  by  Section  3173  R.  S.  called  at  the  place  of  business  of 
the  taxpayer  for  the  annual  list  or  return,  at  which  time  the  ques- 
tion of  the  company's  liability  was  freely  and  frankly  discussed  by 
the  officers  of  the  company  and  the  agent  of  the  Internal  Revenue 
Department  with  a  view  to  the  determination  of  the  best,  quickest 
and  fairest  means  of  settling  the  question  of  the  company's  liability. 
Shortly  following  this,  the  taxpayer,  pursuant  to  the  advice  of  the 
collector,  filed  a  voluntary  return.  *  *  *  As  a  practical  matter, 
where  there  has  been  no  substantial  delinquency  but  only  a  techni- 
cal violation  of  the  statute,  and  where  the  negligence  of  the  tax- 
payer was  not  intentional,  such  cases  have  been  compromised  by  the 
payment  of  nominal  penalties  such  as  $5  by  individuals  and  $10 
by  corporations." 


878  545  U.  S.  TAX  CASES 

(3)  "The  construction  given  this  statute  by  the  collector  when 
he  returned  this  penalty  to  the  Dayton  Brass  Castings  Company  was 
based  upon  the  same  state  of  facts  established  by  the  evidence  in 
this  case.  While  the  presumption  that  the  Department  charged 
with  the  execution  of  a  law  has  properly  interpreted  it,  may  be 
strengthened  in  proportion  to  the  time  such  construction  has 
obtained;  nevertheless,  a  construction  of  a  statute  by  the  Depart- 
ment charged  with  the  enforcement  thereof  should  be  given  due 
consideration  regardless  of  the  length  of  time  such  construction  has 
been  adopted  and  enforced  by  that  Department. ' ' 

DETKOIT  HOTEL  CO.  v.  BRADY,  COLLECTOR 

(U.  S.  District  Court,  E.  D.  Michigan,  S.  D.,  October  25,  1921) 

(275  Fed.  995) 

Record:  Act  of  August  5,  1909.  Action  in  assumpsit  to 
recover  from  the  defendant,  as  collector  of  mternal  revenue,  the 
amount  of  certain  taxes,  paid,  under  protest,  to  his  predecessor  in 
office  by  the  plaintiff  corporation.    Judgment  for  defendant. 

Facts :  The  plaintiff  corporation  was  organized  under  the  laws 
of  Michigan:  "To  purchase  suitable  land  in  the  city  of  Detroit, 
Michigan,  and  construct  thereon  a  modern  fireproof  hotel  and  to 
operate,  manage  or  lease,  mortgage  or  sell  the  same. ' '  The  corpora- 
tion secured  the  land,  built  the  hotel  and  leased  the  same  to  another 
corporation  which  operated  it.  The  rental  was  payable  in  monthly 
installments  *  *  at  the  office  of ' '  the  plaintiff  and  the  amount  of  such 
rent  was  dependent  upon  the  extent  of  the  lessee 's  profits  from  the 
operation  of  the  hotel.  The  lease  gave  the  plaintiff  the  right  to 
inspect  the  books  and  accounts  of  the  lessee  at  all  reasonable  times. 
Later  the  plaintiff  added  five  stories  to  the  hotel  and  negotiated 
loans  for  this  purpose,  secured  by  mortgages  on  the  property,  and 
thereupon  entered  into  a  new  lease  with  the  operating  company  at 
an  increased  rental.  The  plaintiff  filed  the  annual  report  required 
by  the  Michigan  statutes.  Aside  from  the  foregoing,  the  activities 
of  the  plaintiff  corporation  during  the  years  covered  by  the  tax  in 
question  were  "only  such  as  were  incident  to  the  receipt  of  rents 
from  the  lessee  and  distributing  the  same  for  interest  charges  and 
as  dividends." 


545  U.  S.  TAX  CASES  879 

Questions:  (1)  Was  the  plaintiff '* carrying  on  or  doing  busi- 
ness" within  the  meaning  of  the  Act  of  August  5,  1909?  . 

(2)  If  the  taxes  in  question  were  improperly  exacted  by  the 
predecessor  in  office  of  the  defendant  collector,  can  they  be  recov- 
ered from  the  defendant  in  this  action  ? 

Decision:  (1)  "I  am  satisfied  that  the  acts  and  activities  of 
the  plaintiff  during  the  years  mentioned  constituted  "the  carrying 
on  or  doing  business  by  such  corporation,"  within  the  meaning  of 
Section  38  of  the  Corporation  Excise  Tax  Act,  and  that  therefore 
the  taxes  in  question  were  properly  assessed  and  paid." 

(2)  "While  the  defendant  is  in  the  pleadings  herein  desig- 
nated as  collector  of  internal  revenue,  it  is  clear,  as  is  indicated  by 
the  language  of  the  declaration  hereinbefore  quoted,  that  this  ac- 
tion is  brought  against  him  personally,  to  recover  from  him  money 
alleged  to  have  been  wrongfully  received  by  him  from  plaintiff, 
giving  rise  to  an  obligation  on  his  part  to  repay  such  money  to  the 
plaintiff.  *  *  *  Defendant,  however,  never  having  received  any 
of  these  taxes,  can  not,  under  any  statutory  provision  or  theory  of 
law  known  to  this  court,  be  required  to  pay  the  amount  thereof  to 
the  plaintiff  in  the  present  action.  *  »  *  Various  statutory 
provisions  are  invoked  and  discussed  by  plaintiff  in  support  of 
its  contentions  to  the  effect  that  its  'complaint  is  really  against  the 
United  States  official,  in  substance  against  the  United  States,  and 
the  personal  element  is  eliminated.'  No  statute,  however,  is 
referred  to,  and  I  know  of  none,  which  provides  for  a  recovery  from 
one  collector  of  internal  revenue,  in  an  action  in  assumpsit  brought 
against  him,  of  taxes  not  paid  to,  nor  received  by,  him,  at  least 
where  an  action  has  not  been  first  properly  brought  against  the 
collector  receiving  the  taxes  and  thereafter  duly  revived  against  his 
successor  in  office.  The  absence  of  any  such  statute  is,  of  course, 
fatal  to  recovery  upon  the  theory  thus  advanced. ' ' 

DOLL  V.  EVANS  et  al. 
(U.  S.  Circuit  Court,  E.  D.  Pennsylvania,  April  1,  1872) 

(Fed.  Case  No.  3969) 
Record :    Act  of  June  30, 1864.  Action  to  recover  tax  paid.  De- 
murrer to  plea.  Judgment  upon  the  demurrer,  for  the  defendants. 


880  545  U.  S.  TAX  CASES 

Facts :  Plaintiff  made  a  return  of  his  income  for  the  year  1868 
and  paid  an  income  tax  of  $95.60.  Within  the  15  months  thereafter 
provided  by  the  statute,  the  assessor  notified  the  plaintiff  to  appear 
and  produce  his  books  of  account,  and,  when  this  was  not  done, 
assessed  an  additional  tax  of  $482.64  plus  a  one  hundred  per  cent 
penalty  of  $482.84,  and  the  total  amount  of  $965.68  was  collected 
from  plaintiff  by  distraint. 

Questions:  (1)  Has  an  assessor  of  internal  revenue  power  to 
re-assess  the  income  tax  of  a  citizen,  who  has  paid  the  tax  first 
assessed  against  him? 

(2)  Is  the  act  of  Congress  which  imposes  an  addition  of  one 
hundred  per  centum  to  the  tax  as  a  penalty  for  the  "return  of  a 
false  or  fraudulent  list  or  valuation ' '  constitutional  ? 

Decision:  (1)  "Now,  at  any  time  within  fifteen  months  after 
the  annual  list  is  delivered  to  the  collector  a  reassessment  may  be 
made,  and  only  the  additional  tax  thus  ascertained  is  to  be  charged 
and  put  on  another  list  called  the  'monthly  list.'  By  this  extension 
of  the  period  for  reassessment  beyond  the  time  when  the  original 
tax  must  be  paid,  and  the  provisions  for  the  collection  of  the  addi- 
tional tax  only  upon  the  monthly  list  it  is  apparent  that  the  asses- 
sor's power  of  re-assessment  is  to  be  exercised  independently  of  the 
fact  of  the  payment  or  non-payment  of  the  tax  charged  in  the 
annual  list.  It  follows,  therefore,  that  the  additional  tax  assessed 
upon  the  plaintiff  was  authorized  by  the  act  of  Congress. ' ' 

(2)  The  validity  of  an  appraisement  and  an  additional  duty 
imposed  under  the  customs  laws  has  been  sustained  by  the  Supreme 
Court,  despite  the  fact  that  the  powers  exercised  by  the  appraisers 
were,  beyond  question,  judicial  in  their  nature.  ' '  Their  conclusion 
is  a  most  expressive  affirmance  of  the  validity  of  such  legislation. 
So,  also,  in  the  present  cases  the  investiture  of  the  assessor  with 
analogous  functions  must  be  sustained,  as  auxiliary  to  the  execu- 
tion of  the  same  constitutional  grant  of  power  to  Congress. ' ' 

DUGAN  et  al.  v.  MILES,  COLLECTOR 
(U.  S.  District  Court,  D.  Maryland,  Dec.  1,  1921) 
(276  Fed.  401) 
Record :    At  Law.    Action  to  recover  part  of  federal  estate  tax 
paid.    On  demurrer  to  the  declaration.    Sustained  in  part. 


545  U.  S.  TAX  CASES  881 

Facts :  The  decedent,  after  bequeathing  certain  taxable  lega- 
cies which  were  not  involved  in  this  case,  left  all  the  rest  of  his 
estate  to  trustees,  during  the  life  of  his  widow.  The  trustees  were 
to  accumulate  the  income  thereon,  were  to  pay  her  an  annuity  of 
$25,000  during  her  life,  and  at  her  death,  after  applying  $250,000 
to  such  uses  as  she  might  by  will  appoint,  they  were  to  turn  all  of 
the  rest  of  his  estate  over  to  three  corporations,  legacies  and  devises 
to  every  one  of  which  are  exempt  from  the  estate  tax.  All,  there- 
fore, that  can  be  taxable  is  what  the  widow  is  either  to  receive  or 
dispose  of.    Further  facts  are  given  in  the  Decision  below. 

Questions :    See  Decision  below. 

Decision :  (1)  "The  defendant  has  insisted  on  collecting  the 
estate  duty  on  the  value  of  the  annuity,  computed  at  $165,325.25, 
and  upon  the  full  quarter  of  a  million  over  which  the  widow  is  given 
power  of  testamentary  appointment.  That  is  to  say,  the  estate  has 
been  required  to  pay  upon  $415,325.25.  It  is  clear  that  this  sum 
largely  exceeds  the  present  value  of  everything  which  will  in  any 
sense  ever  go  to  the  widow,  and  that  therefore  something  has  been 
taxed  which  Congress  intended  to  exempt. 

"Apparently  in  calculating  the  present  value  of  the  annuity, 
the  treasury  assumed  money  to  be  worth  4%  and  that  rate  will  be 
used  for  illustrative  purposes.  Any  other  will  do  as  well.  At  it, 
the  $250,000,  over  which  the  widow  has  the  power  of  testamentary 
appointment,  will,  while  the  trustees  hold  it,  produce  $10,000 
per  annum  and  to  make  up  her  full  annuity  $15,000  will  have 
to  be  supplied  by  other  portions  of  the  estate,  and  that  is  all  that 
will  come  from  other  sources.  The  present  worth  of  an  annuity  of 
$15,000  is,  of  course,  just  three-fifths  of  one  of  $25,000,  or,  at  the 
rate  assumed,  $99,195.15.  It  is  therefore  demonstrable  that  using 
the  assumed  rate  of  interest,  everything  the  widow  gets  is  $250,000 
plus  $99,195.15,  or,  $349,195.15,  and  that  is  all  that  should  be  tax- 
able, if  full  effect  is  to  be  given  the  will  of  Congress." 

(2)  "The  declaration  contains  four  counts  to  each  of  which 
the  defendant  has  demurred.  The  first  recites  such  of  the  provi- 
sions of  the  will  as  require  the  trustees  to  accumulate  the  income  of 
the  estate  during  the  widow 's  life,  and  the  fact  that  all  such  accumu- 
lations after  her  death  go  to  the  exempt  corporations.    From  what 


882  545  U.  S.  TAX  CASES 

has  been  said,  it  is  apparent  that  this  count  discloses  a  cause  of 
action  not  indeed  to  recover  the  tax  on  all  the  $250,000,  but  on  so 
much  of  it  as  is  levied  upon  the  difference  between  $250,000  pres- 
ently demandable,  and  the  same  sum,  payable  without  interest  after 
the  death  of  the  widow. ' ' 

(3)  "The  Government  further  objects  that  the  appeal  to  the 
Commissioner  made  no  reference  to  the  annuity,  and  did  ask  him  to 
refund  the  entire  tax  on  the  $250,000.  Even  so,  all  the  facts  nec- 
essary to  bring  to  his  attention  plaintiff's  right  to  a  part  of  it  were 
disclosed,  and  if  the  time  in  which  a  new  appeal  could  be  taken  had 
expired,  I  should  have  little  difficulty  in  holding  that  in  this  respect 
the  count  was  good. ' ' 

(4)  "The  Government  contends  that  the  declaration  does  not, 
in  any  of  its  counts,  sufficiently  allege  that  the  payment  was  made 
under  duress.  Of  course,  everybody  knows  that  the  only  reason  the 
money  was  paid  was  because  the  collector  insisted  that  it  should  be. 
The  Government  apparently,  however,  feels  that  a  bad  precedent 
would  be  established  if  it  did  not  require  the  plaintiff  to  say,  in  so 
many  words,  that  they  paid  only  under  compulsion.  As  that  request 
can  be  so  easily  complied  with,  there  is  no  reason  why  the  Govern- 
ment's wishes  should  not  be  met;  but  as  that  has  not  as  yet  been 
done,  ti^e  demurrer  to  the  first  count  will  be  sustained." 

(5)  "The  theory  of  the  second  count  appears  to  be  that  the 
utmost  that  the  Government  was  entitled  to  levy  upon  was 
$250,000,  and  that  having  assessed  the  annuity  at  $165,325.25,  all 
that  remained  to  be  taxed  was  the  difference  between  it  and 
$250,000,  or  $84,674.75.  I  do  not  think  this  is  true,  or  even  partly 
true,  and  the  demurrer  to  this  count  will  be  sustained." 

DU  PONT  V.  GRAHAM,  COLLECTOR 

(U.  S.  District  Court,  D.  of  Del.,  June  13,  1922) 
(Not  yet  reported) 

Record :  Income  Tax  Act  of  1913,  Revenue  Act  of  1921,  and 
R.  S.  Sec.  3224.  In  equity.  Suit  to  restrain  the  defendant  from 
proceeding  to  collect  an  additional  income  tax  assessed  against  the 
plaintiff  for  1916  by  distraint.    Injunction  granted. 


545  U.  S.  TAX  CASES  883 

Facts :  On  September  30,  1915,  the  plaintiff  was  the  owner  of 
37,767  shares  of  the  common  stock  of  the  E.  I.  Du  Pont  de  Nemours 
Powder  Co.,  a  New  Jersey  Company.  On  October  1,  1915,  the  New 
Jersey  Company  transferred  its  assets  to  E.  I.  Du  Pont  de 
Nemours  &  Company,  a  Delaware  corporation.  As  part  of  the  plan 
of  reorganization,  each  stockholder  of  the  New  Jersey  Company 
received  two  shares  of  the  common  stock  of  the  Delaware  Company 
for  share  of  common  stock  held  in  the  New  Jersey  Company,  The 
plaintiff  received  on  October  1,  1915,  a  total  of  75,534  shares  of  the 
common  stock  of  the  Delaware  Company.  On  February  19,  1916, 
the  plaintiff  filed  his  income  tax  return  under  the  Act  of  October  3, 
1913,  and  on  March  4,  1916,  filed  an  amended  return  of  his  income. 
The  plaintiff  did  not,  however,  return  nor  pay  tax  upon  the  said 
stock  dividend  as  part  of  his  income.  On  January  1,  1920,  the 
plaintiff  received  through  the  mails  a  notice  and  demand  dated 
December  1,  1919,  that  he  pay  to  the  defendant  as  collector  the 
sum  of  $1,576,015.86  for  income  tax  for  the  year  1915.  This  assess- 
ment was  not  made  earlier  than  December,  1919,  and  it  was  made  as 
a  result  of  an  amended  return  prepared  by  the  Commissioner  not 
earlier  than  July  22, 1919.  It  was  conceded  that  the  stock  dividend 
upon  which  it  is  attempted  to  hold  the  defendant  liable  had  been 
held  by  the  Supreme  Court  to  be  taxable  income.  U.  S.  v.  Phellis, 
260,  October  Term,  1921,  post. 

Questions:  (1)  "Was  the  amended  return  and  assessment 
made  by  the  Commissioner  invalid,  in  that  they  were  not  made 
within  the  time  stipulated  by  Section  E  of  the  Act  of  1913,  which 
provides  that  in  cases  of  refusal  or  neglect  to  make  a  return  and  in 
cases  of  false  or  fraudulent  returns,  the  Commissioner  of  Internal 
Revenue  shall,  upon  the  discovery  thereof,  at  any  time  within  the 
three  years  after  such  return  is  due,  make  a  return  upon  informa- 
tion obtained  as  provided  for  in  this  section  or  by  existing  law  ? 

(2)  If  the  return  and  assessment  are  invalid,  will  the  court 
enjoin  the  defendant  from  proceeding  to  collect  the  amount  of  the 
assessment  by  distraint  ? 

(3)  Does  R.  S.  Sec.  3224,  prohibiting  suits  for  the  purpose  of 
restraining  assessment  or  collection  of  any  tax,  deny  relief  by 
injunction  in  a  case  where  the  taxpayer,  if  forced  to  pay  the  tax  by 


884  545  U.  S.  TAX  CASES 

distraint,  would  have  no  recourse  at  law,  due  to  the  fact  that  the 
period  within  which  a  claim  for  refund  may  be  filed  has  expired  ? 

Decision :  (1)  "Section  E  of  the  Income  Tax  Act  of  1913,  38 
Stat,  at  Large  169,  after  providing  for  assessment  and  notice  before 
June  1  of  each  successive  year  and  that  assessment  shall  be  paid  on 
or  before  June  30,  provides  that  in  case  of  refusal  or  neglect  to 
make  such  return  and  cases  of  false  or  fraudulent  returns,  the  Com- 
missioner *  shall  upon  the  discovery  thereof,  at  any  time  within  three 
years  after  the  return  is  due,  make  a  return  upon  information 
obtained  as  provided  for  in  this  section  or  by  existing  law,  and  the 
assessment  made  by  the  Commissioner  of  Internal  Revenue  thereon 
shall  be  paid  by  such  person  or  persons  immediately  upon  notifica- 
tion of  the  amount  of  such  assessment. '  *  *  •  The  question  as  to 
whether  the  three  years  within  which  a  return  may  be  made  runs 
from  the  time  of  the  discovery  or  from  the  time  when  the  return  is 
due  has  been  held  against  the  plaintiff  in  a  dictum  in  Elliott  Na- 
tional Bank  v.  Gill,  218  Fed.  600,  but  the  point  was  not  expressly  be- 
fore the  court  either  in  that  case  or  in  Woods  v.  Lewellyn,  252  Fed. 
106,  where  the  inference  is  to  the  contrary.  The  subject  is  discussed 
in  Montgomery's  Tax  Procedure,  Ed.  1921,  page  170,  footnote  18, 
and  the  opinion  of  the  author  is  that  the  punctuation  conveys  a  very 
clear  meaning  that  the  discovery  and  the  assessment  must  be  made 
within  three  years  from  the  time  when  the  return  is  due. ' ' 

(2)  "These  considerations,  however,  all  go  to  the  question  of 
the  invalidity  of  the  return  and  assessment  and  cannot  be  raised 
in  this  proceeding  in  view  of  the  inhibition  of  Section  3224  R.  S. 
providing:  *No  suit  for  the  purpose  of  restraining  the  assess- 
ment or  collection  of  any  tax  shall  be  maintained  in  any  court, '  and 
the  rulings  of  the  Supreme  Court  holding  that  Congress  'has  pro- 
vided a  complete  system  of  corrective  justice  in  regard  to  all  taxes 
imposed  by  the  general  government,  including  provisions  for  recov- 
ering the  tax  after  it  has  been  paid,  by  suit  against  the  collector,  and 
therefore  the  taxpayer  has  no  recourse  to  the  courts  until  after  the 
money  is  paid. '  •  •  *  Therefore,  it  must  be  held  that  the  remedy 
by  injunction  will  not  lie,  unless  because  the  plaintiff  through  the 
threatened  action  of  the  collector  to  collect  through  distraint  is 


545  U.  S.  TAX  CASES  885 

deprived  of  any  redress  at  law,  the  effect  of  Section  3224  upon  the 
facts  of  this  case  has  been  modified  by  subsequent  legislation. ' ' 

(3)  ''By  the  Revenue  Act  of  November  23,  1921,  Section  250 
(d)  Statutes  at  Large,  page  265,  it  is  provided :  'No  suit  or  proceed- 
ing for  the  collection  of  any  such  taxes  due  under  this  Act  or  under 
prior  income,  excess  profits,  or  war  tax  acts,  or  of  any  taxes  due 
under  Section  38  of  such  Act  of  August  5, 1909,  shall  be  begun  after 
the  expiration  of  five  years  after  the  date  when  such  return  was 
filed, '  etc.  As  the  plaintiff 's  return  was  filed  in  March,  1916,  I  see 
no  escape  from  the  conclusion  that  the  above  provisions  of  the  Act 
of  1921  interposes  a  limitation  upon  suits  or  proceedings  which 
expired  in  1921." 

The  court  then  pointed  out  that  by  the  provisions  of  Sections 
252  of  the  Revenue  Act  of  1918,  re-enacted  as  Section  252  of  the 
Revenue  Act  of  1921,  no  claim  for  credit  or  refund  of  taxes  paid  in 
excess  of  that  properly  due  could  be  allowed  or  made  after  five 
years  from  the  date  when  the  return  was  due  unless  before  the 
expiration  of  such  five  years  a  claim  therefor  is  filed  by  the  tax- 
payer. "As  the  five  years  from  the  date  when  the  return  was  due, 
namely,  March,  1916,  has  long  since  expired,  the  plain  meaning  of 
the  above  section  is  that  no  credit  or  refund  could  now  be  lawfully 
allowed  or  made  because  no  claim  therefor  was  filed  by  the  plaintiff 
within  the  five  years.  *  *  *  if  ^^g  plaintiff  pays  the  amount 
demanded,  no  remedy  at  law  is  left  open  to  him  for  the  recovery  of 
such  excess." 

* '  While  Section  3224  has  been  strictly  construed  in  view  of  the 
remedial  system  providing  for  remedies  of  the  taxpayer  against  the 
imposition  of  illegal  taxes  following  Mr.  Justice  Blatchford's  com- 
prehensive discussion  of  the  subject  in  Snyder  v.  Marks,  109  U.  S. 
189,  Congress  has  since  added  to  the  system  the  limitations  con- 
tained in  the  Act  of  1921  and  reading  these  new  provisions  in  con- 
nection with  Section  3224, 1  cannot  conceive  that  Congress  intended 
the  taxpayer  to  be  rigidly  held  to  the  inhibitions  of  Section  3224  if 
the  effect  should  be  to  nullify  the  inhibitions  against  the  ofiicers  of 
the  revenue  contained  in  the  later  statutes  and  thus  to  subject  the 
taxpayer  to  proceedings  by  distraint  without  leaving  him  an  ade- 


886  545  U.  S.  TAX  CASES 

quate  remedy  at  law,  after  the  limitation  had  run  against  the  col- 
lector 's  right  to  begin  such  proceedings. ' ' 

**A  preliminary  injunction  may  issue  restraining  the  defend- 
ant from  proceeding  by  distraint  or  attempting  to  collect  by  dis- 
traint the  taxes  claimed,  without,  however,  including  therein 
restraint  against  collection  by  suit." 

ELIASBERG  BROS.  MERCANTILE  CO.  v.  GRIMES 

(Supreme  Court  of  Alabama,  April  24th,  1920) 
(86  So.  56) 

Record :  Alabama  Revenue  Act  of  1919  and  Sec.  214,  Constitu- 
tion of  Alabama.  Bill  to  restrain  Eliasberg  Bros.  Mercantile  Co. 
from  certifying  to  the  state  tax  officials  the  salary  earned  by  Grimes 
as  an  employee  of  respondent.  From  a  decree  granting  the  relief 
prayed,  respondents  appeal.    Affirmed. 

Facts :  The  Revenue  Act  of  1919  provided  for  a  graduated  tax 
of  from  2  to  4  per  cent,  on  incomes.  Section  214  of  the  Constitution 
of  Alabama  provided  that '  *  the  Legislature  shall  not  have  the  power 
to  levy  in  any  one  year  a  greater  rate  of  taxation  than  sixty-five 
one-hundredths  of  one  per  centum  on  the  value  of  the  taxable  prop- 
erty within  this  state." 

Questions:  (1)  Is  income  "property"  in  the  ordinary  legal 
sense  of  the  word  ? 

(2)  If  so,  is  it  embraced  within  the  meaning  of  the  word 
"property"  as  used  in  the  constitutional  limitation? 

(3)  Is  the  graduated  tax  in  violation  of  the  constitutional 
limitation  ? 

(4)  If  so,  does  the  invalidity  of  part  of  the  income  tax  pro- 
visions render  the  whole  act  void  ? 

Decision:  (1)  "Money  or  any  other  thing  of  value,  acquired 
as  gain  or  profit  from  capital  or  labor,  is  property;  in  the  aggre- 
gate, these  acquisitions  constitute  income;  and,  in  accordance  with 
the  axiom  that  the  whole  includes  all  of  its  parts,  income  includes 
property  and  nothing  but  property,  and  therefore  is  itself 
property. ' ' 


545  U.  S.  TAX  CASES  887 

(2)  "The  language  which  we  have  quoted  from  the  opinions  in 
the  three  cases  supra  exhibits,  we  think,  a  settled  consensus  of  judi- 
cial understanding  that  the  term  'property,'  or  'taxable  property,' 
includes;  all  property  capable  of  ownership  whose  value  can  be 
accurately  determined,  and  that  incomes  are  such  property.  Those 
opinions  were  published  in  the  official  reports,  and  we  must  presume 
that  they  were  known  and  understood  by  the  profession  and  by  the 
members  of  the  Constitutional  Convention  of  1901, ' ' 

(3)  "It  is  not  suggested  that  the  tax  laid  on  incomes  by  our 
Revenue  Act  of  1919  is  an  occupation  or  a  business  or  a  privilege 
tax,  or  that  it  is  anything  but  an  income  tax  in  the  comprehensive 
sense  in  which  it  has  been  heretofore  defined  and  considered.  It 
must  therefore,  be  held  to  be  a  direct  imposition  upon  'property'  as 
such,  as  that  term  is  used  in  Section  214  of  the  Constitution  of  Ala- 
bama ;  and,  being  in  excess  of  the  maximum  rate  of  65/100  of  1  per 
cent  therein  prescribed,  it  is  plainly  and  beyond  any  reasonable 
doubt  offensive  to  that  limitation,  and  its  provisions  must,  in  accord- 
ance with  our  bounden  duty  in  the  premises,  be  pronounced  null  and 
void." 

(4)  "It  is  the  view  of  the  Chief  Justice  that  the  income  pro- 
vision, although  void  as  to  its  levy  in  excess  of  65/100  of  1  per 
centum,  may  nevertheless  be  upheld  as  a  valid  levy  pro  tanto.  In 
our  desire  to  avoid  the  complete  nullification  of  this  important  legis- 
lative provision,  we  have  given  serious  and  anxious  consideration  to 
that  suggestion.  *  *  *  "VVe  have,  however,  reached  the  conclu- 
sion that  to  declare  it  law  in  that  amended  form  would  be  in  effect 
nothing  less  than  judicial  legislation,  and  would  be  a  dangerous 
departure  from  the  settled  rules  that  govern  courts  in  respect  to 
such  legislation." 

FIDELITY  AND  DEPOSIT  COMPANY  OF  MARYLAND 
V.  UNITED  STATES 
(U.  S.  Supreme  Court,  May  29,  1922) 
(Not  yet  reported) 
Record :     Act  of  June  13,  1898.    Action  to  recover  taxes  paid. 
Appeal  from  the  decision  of  the  Court  of  Claims  dismissing  plain- 
tiff's petition.    Motion  to  remand  granted,  with  direction  to  make 


888  545  U.  S.  TAX  CASES 

new  findings  of  fact  as  prayed  and  modify  the  judgment,  if  need 
be,  to  conform  to  this  opinion. 

Facts:  All  the  money  derived  from  the  sale  of  the  capital 
stock  of  the  plaintiff  corporation  and  all  the  money  of  the  surplus 
were  permanently  invested  in  real  estate  (including  the  office  build- 
ing at  Baltimore  in  which  the  company's  business  was  done)  and 
in  bonds,  stocks,  and  other  securities.  These  investments  were  re- 
ferred to  and  were  designated  on  its  books  as  "Capital  Stock  In- 
vestments. ' '  The  securities  and  valuable  papers  representing  them 
were  segregated  in  a  separate  compartment  of  the  company's  vault 
in  separate  envelopes  ear-marked  as  capital  stock.  The  financial 
operations  concerning  them  were  kept  in  a  separate  set  of  books 
distinct  from  the  record  of  all  other  business  transacted  by  the 
company.  In  addition  to  the  banking  business,  the  plaintiff  was 
engaged  also  in  the  surety  business,  the  safe  deposit  business,  and 
the  business  of  acting  as  trustee  under  the  bonds  issued  of  other 
corporations.  The  business  of  the  banking  department  was  like- 
wise kept  separate,  physically  and  as  a  matter  of  accounting,  from 
all  other  business  of  the  company.  The  records  of  its  operations 
were  kept  in  a  distinct  set  of  books.  The  moneys  received  from 
deposits  (which  in  1901  exceeded  $4,000,000)  were  invested  in 
stocks  and  bonds  which  were  kept  in  the  vault  in  separate  envelopes 
ear-marked  as  such.  The  expenses  of  each  department  of  the  com- 
pany's business  were  charged  to  the  separate  accounts  of  that  de- 
partment payable  out  of  its  earnings  but  physically,  expenses  of 
the  several  departments  may  have  been  paid  from  a  common  fund. 
A  part  of  the  income  from  each  department  was  maintained  as 
cash  and  remained  uninvested,  part  of  the  money  being  carried 
by  the  respective  departments  as  counter  cash  and  the  balance  be- 
ing deposited  in  the  company's  various  depositaries.  The  money 
so  deposited  was  not  segregated  according  to  the  source  from  which 
it  came,  though  the  source  of  the  items  comprising  the  total  amount 
was  recorded  in  the  respective  books  of  each  department.  The 
earnings  of  each  department  were  carried  to  the  undivided  profits 
account  of  the  company  at  the  end  of  each  year.  A  portion  of 
the  office  building  was  occupied  by  the  banking  department.  The 
sum  of  $8,300  was  paid  as  special  taxes  for  the  years  1898  to  1901, 


545  U.  S.  TAX  CASES  889 

under  Section  2  of  the  Act  of  June  13,  1898.  The  company  applied 
on  November  22,  1913,  for  a  refund,  alleging  that  the  taxes  had 
been  assessed  and  collected  on  plaintiff's  capital,  but  that  in  fact 
none  of  it  had  been  used  or  employed  in  the  banking  business. 
The  application  was  rejected  by  the  Secretary  of  the  Treasury  on 
April  19,  1917 ;  and  this  suit  was  begun  on  July  25,  1918. 

Questions:  (1)  "Was  this  action  barred  by  the  statute  of  limi- 
tations? -^ 

(2)  Was  the  plaintiff  corporation  using  or  employing  its  capi- 
tal in  the  banking  business,  within  the  meaning  of  the  Act  of  1898  ? 

(3)  If  so,  how  should  the  amount  of  the  tax  be  arrived  at,  in 
view  of  the  fact  that  the  plaintiff  was  also  engaged  in  other  lines 
of  business  ? 

Decision:  (1)  "The  contention  is  that  the  cause  of  action 
accrued  on  May  21,  1914,  which  is  six  months  after  presentation 
of  the  claim  to  the  Commissioner  of  Internal  Revenue;  that  the 
two-year  statute  of  limitations  prescribed  by  Section  3227  of  the 
Revised  Statutes  applies;  that  the  fact  that  the  claim  was  not  re- 
jected by  the  Treasury  Department  until  April,  1917,  is  immate- 
rial, and  that  therefore  the  suit,  which  was  begun  in  July,  1918, 
is  barred.  This  was  the  view  taken  by  the  Court  of  Claims  for 
reasons  theretofore  given  in  Kahn  v.  United  States  (55  Ct.  Cls. 
271).  But,  as  we  held  in  Sage  v.  United  States  (250  U.  S.  33,  39), 
the  six-year  statute  of  limitations  applies  to  cases  arising  under 
the  Act  of  July  27,  1912  (Chapter  256)." 

(2)  "The  company  claimed  that  it  had  not  used  any  of  its 
capital  in  banking  during  any  of  those  years ;  and  duly  requested 
the  lower  court  to  find  as  facts  that :  *  The  entire  business  of  the 
banking  department  was  conducted  solely  on  its  depositors'  money. 
Neither  the  capital  stock  nor  surplus  of  plaintiff  company  was  used 
or  employed  by  or  in  the  banking  department. '  The  court  made  no 
specific  finding  on  that  subject  *  *  *,  The  Government  con- 
tends that  the  findings  requested  are  immaterial,  because,  as  a 
matter  of  law,  all  of  the  capital  (and  surplus)  was  used  or  em- 
ployed in  banking.  *  *  *  In  other  words,  the  contention  is 
that  the  Act  fixes  the  tax  upon  the  banker  'using  or  employing' 


890  545  U.  S.  TAX  CASES 

a  capital;  and  that  a  firm,  or  company,  being  a  banker,  can  not 
escape,  or  reduce,  the  tax  by  showing  that  it  is  engaged  in  several 
lines  of  business  and  that,  in  fact,  none,  or  only  a  part,  of  its  capital 
was  used  specifically  in  its  banking  operations.  *  •  •  ■^y©  can 
not,  on  these  findings  of  fact,  say,  as  matters  of  law,  that  all  the 
capital  of  the  Fidelity  Company  was  used  in  the  banking  business ; 
nor  can  we  say  that  at  least  the  amount  upon  which  the  tax  was 
assessed  (which  in  no  year  was  as  much  as  one-half  the  company's 
capital)  was  so  used.  Capital  may  be  employed  in  banking 
although  it  is  not  used  strictly  as  working  capital  and  none  of  it 
is  used  in  making  loans  or  directly  in  other  banking  transactions. 
Money  of  a  banker  held  in  the  vault  or  with  depositaries  as  a  re- 
serve is  employed  in  banking  as  much  as  money  loaned  to  cus- 
tomers. Capital  invested  in  securities  may  be  employed  in  banking 
even  if  its  sole  use  is  to  give  to  the  banker  the  credit  which  attracts 
depositors  or  to  make  it  possible  for  him  otherwise  to  raise  money 
with  which  banking  operations  are  conducted.  And  if  such  securi- 
ties serve  to  give  credit,  they  will  continue,  also  in  the  legal  sense, 
to  be  capital  used  in  the  banking  business,  even  if  they  are  desig- 
nated by  the  company  as  assets  of  another  department  and  physi- 
cally segregated  as  such.  *  *  *  On  the  facts  found  by  the 
Court  of  Claims  we  are  unable  to  say  that  no  part  of  the  capital 
was  used  in  the  banking  business  or  that  there  was  used  at  least 
as  much  thereof  as  was  represented  by  the  taxes  assessed.  It  fol- 
lows that  in  order  to  determine  what  sums,  if  any,  are  recover- 
able, additional  facts  must  be  found.  The  request  for  further 
findings  made  by  appellant  was  appropriate,  and  the  case  should 
be  remanded  with  directions  to  make  such  findings    •     •     *." 

• 

(3)  "If  a  company  is  engaged  exclusively  in  banking,  all  of 
its  capital,  however  invested,  may  reasonably  be  held  to  be  capital 
employed  in  banking  without  inquiry  into  the  particular  use  to 
which  it  is  put.  *  *  *  But  where  a  company  is  lawfully  en- 
gaged in  several  distinct  businesses  to  the  successful  conduct  of 
each  of  which  credit  is  necessary,  and  the  company's  capital  sup- 
plies such  credit  to  each,  the  whole  of  this  common  capital  cannot 
be  deemed  capital  of  a  single  department.  Under  such  circum- 
stances charges  incident  to  common  capital  are,  in  accounting  prac- 


545  U.  S.  TAX  CASES  891 

tice,  apportioned  ordinarily  among  the  several  departments;  and 
it  may  not  be  assumed  that  Congress  in  laying  this  tax  intended 
to  depart  from  the  usage  of  business." 

FIDELITY  TITLE  &  TRUST  CO.  v.  UNITED  STATES 

(U.  S.  Supreme  Court,  May  29,  1922) 
(Not  yet  reported) 

Record:  Act  of  June  13,  1898.  Action  to  recover  tax  paid. 
Appeal  from  decision  of  the  U.  S.  Court  of  Claims  rendering  judg- 
ment for  the  defendant.    Judgment  affirmed. 

Facts:  The  plaintiff  corporation  carried  on  five  classes  of 
business,  one  of  which  was  banking.  An  amount  in  excess  of  its 
capital  was  permanently  invested  in  bonds  and  real  estate,  the 
latter  including  its  office  building.  A  schedule  of  these  investments 
was  carried  on  the  books  designated  "schedule  of  investments  of 
the  capital  stock  of  $1,000,000 ' ' ;  but  there  was  no  physical  segre- 
gation of  these  assets  from  others  belonging  to  the  company.  Nor 
was  there  segregation  of  the  money  received  from  the  capital  stock 
or  from  investments  made  therewith  from  the  money  derived  from 
earnings  of  the  several  departments.  No  attempt  was  made  to 
segregate  or  earmark  investments  as  having  been  made  for  any 
particular  department.  All  moneys  received  by  the  company,  in- 
cluding bank  deposits,  were  commingled,  and  from  these  general 
funds  all  investments  were  made  and  all  expenses  and  losses  were 
paid.  The  office  building  was  used  by  all  the  departments.  All 
the  earnings  from  the  several  departments  were  pooled  and  went 
into  the  profit  and  loss  account.  There  was  carried  in  this  account 
a  credit  representing  undivided  profits  amounting  in  1898  to  $414,- 
468.86,  which  increased  from  year  to  year  and  was  $948,074.56  in 
1902.  These  undivided  profits  were  not  at  any  time  during  the 
period  in  question  set  apart  in  any  way  as  a  separate  fund,  and 
they  were  at  all  times  subject  to  distribution  by  the  Board  of 
Directors  as  dividends  and  available  for  any  department  of  the 
business.  At  a  date  subsequent  to  the  period  here  in  question  addi- 
tional stock  was  sold  above  par  to  form  a  surplus  fund.  The  sum 
of  $10,028.94  was  assessed  against  the  plaintiff  upon  its  whole 
capital  and  undivided  profits  and  paid  as  bankers  special  taxes 


892  545  U.  S.  TAX  CASES 

under  Section  2  of  the  Spanish  War  Revenue  Act.     This  action 
was  brought  for  the  recovery  of  the  amount  so  paid. 

Questions:  (1)  Was  this  suit,  brought  in  July,  1918,  barred 
by  the  two-year  statute  of  limitations,  because  the  application  for 
refund  had  been  made  in  November,  1913  ? 

(2)  Was  the  plaintiff's  capital  or  undivided  profits  used  or 
employed  in  banking  within  the  meaning  of  the  statute? 

(3)  Were  the  plaintiff's  undivided  profits  a  part  of  its  capital 
within  the  meaning  of  the  Act,  and  so  subject  to  the  tax? 

(4)  Does  the  statute  draw  a  distinction  between  surplus  and 
undivided  profits? 

Decision:  (1)  "In  the  main,  the  facts  are  similar  to,  and  the 
questions  of  law  are  the  same  as,  those  considered  in  Fidelity  & 
Deposit  Co.  V.  United  States,  decided  this  day.  For  the  reasons 
there  stated  we  hold  that  the  action  was  not  barred." 

(2)  "The  burden  lay  on  the  plaintiff  to  establish  that  none  of 
the  company 's  capital,  or  that  less  of  it  than  the  amount  for  which 
it  was  assessed,  had  been  used  or  employed  in  the  banking  depart- 
ment. It  failed  entirely  to  sustain  that  burden.  The  proportions 
of  capital  and  accumulated  profits  used  in  the  respective  depart- 
ments were  not  established  by  the  CAddence.  There  was  no  finding 
that  the  net  profits  of  the  banking  department  were  received  solely 
from  the  use  of  depositors'  money.  And  there  does  not  appear 
to  have  been  any  request  for  a  finding  of  fact  that  no  part  of  the 
capital  and  undivided  profits  was  used  in  banking ;  or  for  a  finding 
of  facts  from  which  the  proportion  so  used,  if  any,  could  be  deter- 
mined. Therefore  the  Court  of  Claims  properly  denied  recovery 
for  any  part  of  the  taxes  paid,  unless  we  can  say,  as  matter  of 
law,  that  undivided  profits,  on  which,  for  the  years  1898  and  1901 
taxes  were  assessed  as  upon  capital,  were  not  assessable  as  such." 

(3)  "The  Act  declares  that  'in  estimating  capital,  surplus 
shall  be  included'  and  that  the  'annual  tax  shall  in  all  cases  be 
computed  on  the  basis  of  the  capital  and  surplus  for  the  preceding 
fiscal  year.'  The  Act  does  not  mention  undivided  profits.  The 
question  is  whether  Congress  intended  to  draw  a  distinction  be- 
tween surplus  and  undivided  profits;  or  intended  that  all  capital 


545  U.  S.  TAX  CASES  893 

actually  used  in  banking  should  be  taxed,  whether  it  was  strictly 
capital  stock,  or  surplus,  or  undivided  profits.  The  company  argues 
that  while  the  word  'surplus'  in  its  general  and  popular  meaning, 
includes  undivided  profits,  Congress,  in  the  Act  of  June  13,  1898, 
used  the  term  in  its  technical  and  restricted  sense  of  a  fund  formally 
set  apart  and  called  surplus  by  the  authorized  officers  of  the  bank ; 
and  that,  as  matter  of  law,  no  tax  can  be  assessed  on  undivided 
profits.  This  view  finds  support  in  opinions  of  the  Attorney  Gen- 
eral rendered  in  1899  and  1900.  (22  Ops.  Atty.  Gen.  320;  23  Ops. 
Atty.  G«n.  341.)  But  his  rulings  were  not  acquiesced  in  by  the 
Treasury  Department.  It  recommended  promptly  an  amendment 
of  the  Act  which  should  expressly  declare  that  undivided  profits 
were  to  be  considered  surplus.  Annual  Reports  of  the  Commissioner 
of  Internal  Revenue  (1899,  p.  91)  (1900,  p.  89) ;  and  it  submitted 
the  question  thereafter  to  the  courts  for  determination.  In 
Leather  Manufacturers'  National  Bank  v.  Treat  (116  Fed.  774) 
(1902),  the  District  Court  held  that  undivided  profits  were  sub- 
ject to  taxation ;  and  the  judgment  in  that  case  was  affirmed  by  the 
Circuit  Court  of  Appeals  for  the  Second  Circuit  (128  Fed.  262) 
(1904).    With  these  courts  we  agree." 

(4)  "By  the  Act  of  1898,  Congress  imposed  the  tax,  not  on 
incorporated  banks  only,  but  also  on  any  person,  firm,  or  company 
engaged  in  banking.  And  it  measured  the  tax  by  the  amount  of 
capital  actually  used  or  employed  in  banking.  The  technical  dis- 
tinction between  capital,  surplus,  and  undivided  profits  is  obviously 
not  applicable  to  the  banking  business  when  conducted  by  indi- 
viduals or  firms,  and  the  distinction  between  surplus  and  undi- 
vided profits,  while  commonly  observed  by  incorporated  banks,  is 
not  ordinarily  made  by  other  business  corporations.  As  it  is  the 
use  or  employment  of  capital  in  banking,  not  mere  possession 
thereof  by  the  banker,  which  determines  the  amount  of  the  tax, 
the  fact  that  a  portion  of  the  capital  so  used  or  employed  is  desig- 
nated 'undivided  profits'  is  of  no  legal  significance." 


894  545  U.  S.  TAX  CASES 

FIDELITY  TRUST  CO.  v.  LEDERER,  COLLECTOR 

(U.  S.  District  Court,  E.  D.  Perm.,  July  14,  1921) 
(276  Fed.  51) 

Record:  Revenue  Act  of  1918.  Action  to  recover  amount  of 
stamp  tax  paid  under  protest.  Sur  rule  for  judgment.  Rule 
discharged. 

Facts:  The  Revenue  Act  of  1918  imposes  a  stamp  tax  "on 
all  bonds,  debentures,  or  certificates  of  indebtedness  issued  by  any 
person,  and  all  instruments,  however  termed,  issued  by  any  cor- 
poration with  interest  coupons  or  in  registered  form,  known  gen- 
erally as  corporate  securities,  on  each  $100  of  face  value  or  fraction 
thereof,  5  cents."  The  Government  compelled  the  plaintiff  in  this 
case  to  pay  a  stamp  tax  on  certain  certificates  known  as  *  *  car  trust 
certificates."  These  certificates  are  described  by  the  court  as  fol- 
lows: **They  are  called  for  because  some  railroad  or  other  trans- 
portation company  is  in  need  of  rolling  stock  or  other  equipment, 
and  is  without  funds  or  credit  with  which  to  supply  itself,  and 
there  is  a  legal  or  other  difficulty  in  the  way  of  a  direct  pledge 
of  the  property.  They  are  issued  under  a  number  of  different 
plans.  The  one  with  which  we  are  concerned  is  known  as  the  Phila- 
delphia plan.  Those  willing  to  share  in  the  venture  are  invited  to 
place  their  contributions  in  the  hands  of  an  acceptable  trustee. 
The  rolling  stock,  or  other  property,  is  then  purchased  in  the  name 
of  this  trustee  as  owner.  The  trustee  then  enters  into  a  form  of 
bailment  or  conditional  sale  agreement  with  the  carrier,  the  peri- 
odical and  final  payments  upon  which  are  sufficient  to  pay  the 
interest  on  the  investment  and  the  principal  at  maturity.  The 
contributors  in  the  meantime  hold  the  certificates  or  acknowledg- 
ment of  the  trustee  of  their  respective  shares  in  the  venture. ' ' 

Question :  Are  car  trust  certificates,  described  as  above,  issued 
under  the  Philadelphia  plan,  subject  to  the  stamp  tax  imposed 
under  the  Revenue  Act  of  1918  ? 

Decision:  A  certificate  of  the  kind  involved  here  not  being 
"a  certificate  of  indebtedness  issued  by  any  person,"  nor  "an  in- 
strument issued  by  any  corporation,"  would  be  exempt  if  the  tax- 
ing hand  has  been  laid  only  upon  these  specific  forms  of  what  are 


545  U.  S.  TAX  CASES  895 

generally  known  as  securities.  "The  Act  of  Congress,  however, 
includes  more  than  the  two  kinds  of  securities  mentioned  above, 
because  we  think  it  includes  everything  'known  generally  as  cor- 
porate securities. '  That  these  trust  certificates  are  so  known  would 
not  be  denied."    •    *    • 

"The  real  truth  back  of  the  whole  discussion  is  that,  if  these 
securities  are  not  taxable,  it  is  because  of  the  accidental  circum- 
stance of  a  wholly  nominal  separation  of  the  security  held  by  the 
taxpayer  from  the  obligation  of  debt  entered  into  by  the  carrier 
corporation.  The  real  security  is  the  promise,  not  of  one  corpora- 
tion, but  of  two,  to  pay  to  the  certificate  holders  the  sum  due  them. 
The  real  transaction  is  the  request  of  the  carrier  company  made 
to  the  certificate  holders  to  advance  the  money  required  for  equip- 
ment, in  consideration  of  which  the  carrier  agrees  to  pay  back  the 
sum  advanced,  with  interest.  *  *  *  It  is,  however  and  none 
the  less,  true  that,  if  for  any  reason  Congress  has  not  included 
these  certificates,  no  tax  can  be  imposed.  The  impression  of  this 
effect  made  by  the  argument  at  bar  has  been  removed  by  what  seems 
to  us  to  be  the  sufficiently  expressed  will  of  Congress  to  tax  them. ' ' 

FONTENOT,  COLLECTOR  v.  ACCARDO 

WITH  FOUR  OTHER  SIMILAR  CASES 

(U.  S.  Circuit  Court  of  Appeals,  Fifth  Cir.,  Feb.  15,  1922) 

(278  Fed.  871) 
Record:     National  Prohibition  Act  and  Rev.  Stat.  Sec.  3224. 
Bills  in  equity  to  enforce  collection  of  taxes  and  penalties.    From 
decrees  in  favor  of  plaintiff  (269  Fed.  447,  ante  222)  defendants 
appeal.    Affirmed. 

Facts :  The  object  of  the  suits  was  to  prevent  by  injunction 
the  collection  by  distraint  of  certain  assessments  levied  under  sec- 
tion 35  of  the  National  Prohibition  Act.  This  section  provides  for 
a  tax  in  double  the  amount  formerly  provided  by  law,  with  addi- 
tional penalties,  against  persons  responsible  for  the  illegal  manu- 
facture or  sale  of  intoxicating  liquor.  In  all  of  the  cases  motions 
to  dismiss  were  made  on  the  ground  that  the  court  was  without 
jurisdiction  because  of  Rev.  Stat.  Sec.  3224,  which  prohibits  suits 
for  the  purpose  of  restraining  the  assessment  and  collection  of  a  tax. 


896  545  U.  S.  TAX  CASES 

Question:  Is  the  assessment  authorized  by  section  35  of  the 
National  Prohibition  Act  a  tax  or  a  penalty  ? 

Decision:  "None  of  the  bills  averred  a  tender  of  the  so-called 
'tax,'  as  distinguished  from  the  additional  'penalty,'  and  it  may 
be  assumed  that  the  bills  should  have  been  dismissed  if  any  part 
of  an  assessment  authorized  by  the  above-quoted  section  is  in 
reality  an  assessment  of  a  tax." 

If  section  35  authorizes  a  tax  assessment,  the  collection  of  the 
tax  may  not  be  enjoined ;  but  if  it  authorizes  a  penalty  assessment, 
section  3224  is  inapplicable  and  injunction  may  issue  upon  proper 
showing  for  relief. 

"While  under  the  revenue  laws  one  claimed  to  be  liable  had 
no  means  of  preventing  the  Government  from  collecting  a  tax  im- 
posed upon  him,  yet  it  was  provided  by  section  3226  that  he  could 
recover  back  by  suit  a  tax  illegally  assessed  and  collected.  But  it 
is  not  contemplated  by  any  provision  of  law  that  one  who  is  forced 
to  pay  any  illegal  penalty  can  recover  it  back  by  suit.  Nor  is  it 
the  law  that  a  penalty  as  such  is  collectible  by  distraint  proceed- 
ings. Section  3213  (Comp.  St,  5937)  makes  it  the  duty  of  the 
collectors  to  sue  for  the  collection  of  penalties  and  forfeitures,  and 
opportunity  is  thus  afforded  for  a  hearing  and  defense. 

"The  fact  that  section  35  of  the  Act  does  not  provide  for 
notice  is  persuasive  that  it  was  intended  to  assess  penalties,  to  be  en- 
forced in  the  usual  way  by  fine  or  by  suit.  If  it  had  been  intended 
to  assess  taxes,  no  doubt  a  requirement  of  notice  before  distraint, 
levy,  and  sale  would  have  been  provided  in  order  to  give  oppor- 
tunity to  be  heard. 

' '  We  are  of  opinion  that  the  assessments  involved  in  these 
cases  were  assessments  of  penalties  and  are  not  collectible  by  dis- 
traint proceedings.  Of  course,  the  collection  of  penalties  can  be 
enforced  by  the  methods  and  proceedings  authorized  by  law. ' ' 

FOX  v.  EDWARDS,  COLLECTOR 
(U.  S.  District  Court,  S.  D.  New  York,  Feb.  24,  1922) 
(280  Fed.  413) 
Record :    Revenue  Act  of  1918.    Action  to  recover  taxes  paid. 
Defendant's  demurrer  sustained  and  complaint  dismissed.     Af- 
firmed on  rehearing. 


545  U.  S.  TAX  CASES  897 

Facts :  The  money  for  the  recovery  of  which  suit  was  brought 
was  paid  voluntarily  in  March,  1919,  as  a  part  of  the  plaintiff's 
income  tax  for  the  year  1918.  The  item  of  loss  upon  account  of 
which  plaintiff  claimed  a  refund  was  not  called  to  the  attention 
of  any  Government  official  prior  to  March,  1921. 

Question:  May  a  tax  paid  voluntarily  and  without  protest 
be  recovered  by  suit  ? 

Decision:  The  original  tax  having  been  transmitted  to  the 
Government  without  protest  or  complaint  upon  the  part  of  the 
plaintiff,  as  against  the  Collector  there  could  be  no  recovery  at 
common  law  nor  under  the  Statutes  relating  to  him  or  to  his  office. 
There  is  nothing  in  Section  252  of  the  Kevenue  Act  of  1918  which 
would  relieve  the  plaintiff  from  the  effect  of  having  voluntarily 
paid  an  amount  of  taxes  against  which  he  might  have  offset  a  bad 
debt. 

GALVESTON  ELECTRIC  CO.  v.  GALVESTON 

(U.  S.  Supreme  Court,  April  10,  1922) 
(Not  yet  reported) 

Record:  Appeal  from  the  District  Court  for  the  Southern 
District  of  Texas  to  review  a  decree  dismissing  without  prejudice 
the  bill  in  a  suit  to  enjoin  the  enforcement  of  a  street  railway  rate 
ordinance.    Affirmed.    See  same  case  below  (272  Fed.  147). 

Facts :  There  were  a  number  of  questions  in  this  case  but  the 
only  one  which  has  a  bearing  on  income  or  similar  taxation  is  stated 
below. 

Question:  In  calculating  whether  any  given  fare  will  yield 
a  proper  return  to  a  street  railway  company,  is  the  amount  of  the 
Federal  income  tax  paid  by  the  company  a  proper  deduction  from 
gross  revenue? 

Decision:  "The  remaining  item  as  to  which  the  master  and 
the  court  differed  relates  to  the  income  tax.  The  company  assigns 
as  error  that  the  master  allowed,  but  the  court  disallowed,  as  a 
part  of  the  operating  expenses  for  the  year  ending  June  30,  1920. 
the  sum  of  $16,254,  paid  by  the  company  during  that  year  for 
Federal  income  taxes.     The  tax  referred  to  is  presumably  that 


898  545  U.  S.  TAX  CASES 

imposed  by  the  Act  of  February  24,  1919,  chap.  18,  sections  230- 
238,  40  Stat,  at  L.  1057,  1075-1080,  Comp.  Stat,  sections  6371i/4a, 
6336%nn-6336%rr,  which,  for  any  year  after  1918,  is  10  per  cent 
of  the  net  income.  In  calculating  whether  the  5-cent  fare  will 
yield  a  proper  return,  it  is  necessary  to  deduct  from  gross  revenue 
the  expenses  and  charges;  and  all  taxes  which  would  be  payable 
if  a  fair  return  were  earned  are  appropriate  deductions.  There  is 
no  difference  in  this  respect  between  State  and  Federal  taxes,  or 
between  income  taxes  and  others.  But  the  fact  that  it  is  the  Fed- 
eral corporate  income  tax  for  which  deduction  is  made  must  be 
taken  into  consideration  in  determining  what  rate  of  return  shall 
be  deemed  fair.  For,  under  section  216,  the  stockholder  does  not 
include  in  the  income  on  which  the  normal  Federal  tax  is  payable 
dividends  received  from  the  corporation.  This  tax  exemption  is 
therefore,  in  effect,  part  of  the  return  on  the  investment. ' ' 

GAVIT  V.  IRWIN,  COLLECTOR 

(U.  S.  District  Court,  N.  D.  New  York,  August  22,  1921) 

(275  Fed.  643) 

Record:  Revenue  Act  of  1913.  Action  to  recover  taxes  paid 
under  protest.    Demurrer  to  complaint  overruled. 

Facts:  By  the  terms  of  the  will  of  Anthony  N.  Brady,  de- 
ceased, his  estate  was  divided  into  six  equal  parts,  and  one-sixth 
was  devised  in  trust  to  his  executors,  who  were  thereby  made  trus- 
tees. The  trustees  were  directed  to  apply  so  much  of  the  income 
and  profits  from  such  one-sixth  as  in  their  discretion  they  thought 
necessary  for  the  plaintiff's  daughter,  and  to  divide  the  remainder 
of  the  income  of  such  one-sixth,  not  necessary  for  the  support  of 
the  daughter,  into  two  parts,  one  of  said  parts  to  be  paid  to  the 
plaintiff  during  his  life,  but  not  longer  than  the  infancy  of  his 
daughter,  and  not  longer  than  her  natural  life,  should  she  die  be- 
fore attaining  the  age  of  twenty-one  years.  During  the  tax  years 
of  1913, 1914,  and  1915,  the  plaintiff  received  certain  sums  of  money 
under  the  provisions  of  the  above-mentioned  will,  upon  which  he 
had  been  required  to  pay,  as  normal  tax,  additional  tax,  and  pen- 
alties, the  sum  of  $21,602,16.  This  action  was  brought  against  the 
collector  to  recover  the  amounts  so  paid. 


545  U.  S.  TAX  CASES  899 

Question:  (1)  Were  the  amounts  received  by  the  plaintiff 
income  within  the  meaning  of  the  Sixteenth  Amendment  to  the 
Constitution  of  the  United  States? 

(2)  "Were  the  amounts  received  by  the  plaintiff  income  within 
the  meaning  of  the  Revenue  Act  of  1913  ? 

(3)  Is  the  right  to  inherit  to  be  considered  as  capital  from 
which  taxable  income  may  be  derived  ? 

Decision:  (1)  ** The  courts  have  held  that  income,  within  the 
meaning  of  the  Constitution  and  the  Income  Tax  Act  passed  pursu- 
ant to  the  Sixteenth  Amendment,  must  be  taken  in  the  common 
understanding  of  the  term.     Eisner  v.  Macomber,  252  U.  S.  189. 

•  *  *  Income,  as  laid  down  by  the  United  States  Supreme 
Court,   within   the   purview   of   the   constitution,   is   defined   as: 

•  •  *  ( fpjj^g  g^jj^  derived  from  capital,  from  labor,  or  from  both 
combined,  provided  it  be  understood  to  include  profits  gained 
through  a  sale  or  conversion  of  capital  assets.'  *  *  *  Since 
the  moneys  received  by  plaintiff  were  not  income  from  labor, 
nor  from  labor  and  capital  combined,  nor  from  the  sale  or  con- 
version of  capital  assets,  we  have  only  to  do  with  income  received 
from  capital.  Income,  as  now  considered,  is,  after  the  severance, 
separate  and  apart  from  the  capital;  it  is  as  separate  and  apart 
from  the  capital  as  the  fruit  from  the  tree,  the  crops  from  the  land, 
or  the  waters  in  the  outlet  stream  after  passing  out  of  the  reser- 
voir. It  is  something  which  has  grown  out  of  or  issued  from  capi- 
tal, leaving  the  capital  unimpaired  and  intact.  Having  these  con- 
siderations in  mind,  it  cannot  be  said  that  these  moneys  received  by 
the  plaintiff  arose  from  any  capital  of  his." 

(2)  "There  is  nothing  in  the  Act  of  1913  which  taxes  income 
which  is  not  the  income  of  the  citizen  or  the  individual  sought  to  be 
taxed.  *  *  *  There  is  no  suggestion  in  subdivision  B  that  the 
income  of  estates  as  such,  regardless  of  what  disposition  is  made  of 
the  income,  shall  be  taxable,  and  the  tax  thereon  paid  by  any  person, 
either  in  his  individual  right  or  as  fiduciary.  The  other  provisions 
of  the  Act  relating  to  fiduciaries  are  in  entire  harmony  with  this 
construction.  Subdivision  2,  paragraph  D,  requires  the  guardians, 
trustees,  etc.,  of  persons  who  are  subject  to  an  income  tax  be- 


900  545  U.  S.  TAX  CASES 

cause  of  the  amount  of  income  received  from  such  property,  ac- 
quired by  gift,  bequest,  devise,  or  descent,  to  make  a  return  of  the 
net  income  of  such  persons,  subject  to  this  tax,  for  whom  such 
guardians  or  trustees  act.  *  *  *  To  make  these  fiduciary  pro- 
visions and  subdivision  B  applicable,  and  to  bring  a  person  there- 
under, there  must  be  both  income  of  the  property  received  by  gift, 
bequest,  devise,  or  descent,  and  also  the  property  or  capital  itself. 
Unless  there  is  both,  there  is  no  income  within  the  meaning  of  these 
provisions  of  the  Income  Tax  Law,  and  no  income  tax  to  be  paid ; 
nor  is  there  any  return  to  be  made  by  the  fiduciaries,  nor  any  tax 
to  be  withheld  from  the  moneys  paid  to  the  beneficiary.  Applying 
this  to  the  case  at  bar,  we  must  find  as  to  the  plaintiff  both  the  in- 
come from  the  property  acquired  by  gift,  bequest,  devise,  or  descent, 
and  the  property  itself,  within  the  meaning  of  the  Income  Tax  Law 
of  1913.  If  these  moneys  received  by  the  plaintiff  from  the  trustees 
from  this  one-sixth  portion  of  the  Brady  estate  are  income  as  to  him, 
where  is  the  property  acquired  by  the  plaintiff  from  the  Brady 
estate — in  other  words  his  capital,  either  in  present  possession  or 
right  of  future  possession,  from  which  the  income  arose?  Clearly 
there  is  none.  He  never  gets  the  property  which  produces  the 
income.  So  as  to  him  there  is  not  both  the  property  acquired  by 
gift,  bequest,  devise,  or  descent  and  the  income  thereof.  *  *  * 
From  the  foregoing  it  must  be  determined  that  there  is  no  provi- 
sion of  the  income  tax  law  of  1913  by  which  it  can  be  held  that 
the  moneys  received  by  plaintiff  during  these  years  1913,  1914,  and 
1915  are  income  and  taxable. ' ' 

(3)  "The  learned  district  attorney  recognizes  and  concedes 
that  *  income '  must  be  something  separate,  apart,  and  distinct  from 
'capital,'  both  belonging  to  the  plaintiff.  He  argues  in  his  brief 
that  the  right  to  receive  the  moneys  must,  of  necessity,  be  the  capi- 
tal or  corpus  from  which  the  moneys  received  by  the  plaintiff  ac- 
crued. This  contention  does  not  carry  conviction.  Heirs  have  a 
right  to  inherit.  That  does  not  make  the  inheritance  income.  So, 
too,  an  instrument  providing  for  the  future  transfer  of  property 
would  give  the  transferee  the  right  to  it,  but  would  not  thereby 
make  the  transferred  property  income.     •     •     •     To  call  such  a 


545  U.  S.  TAX  CASES  901 

right  property  or  capital,  or  the  equivalent  thereof,  within  the  pro- 
visions of  the  Act  of  1913,  would  be  unreasonable." 

IN  EE  GENERAL  FILM  CORPORATION 
UNITED  STATES  v.  KELLOGG 

(U.  S.  Circuit  Court  of  Appeals,  Second  Cir.,  June  8,  1921) 
(274  Fed.  903) 

Record:  Act  of  October  13,  1913.  Bankruptcy  proceedings. 
An  order  of  the  referee  disallowing  claims  of  the  United  States  for 
taxes  was  affirmed  by  District  Court.  Appeal  by  United  States. 
Affirmed. 

Facts:  The  United  States  filed  proof  of  claim  against  the 
General  Film  Corporation,  bankrupt,  under  the  above  Act  for  in- 
come tax  with  interest.  The  trustee  in  bankruptcy  objected  to  the 
allowance  of  the  claim  on  the  ground  that  the  company  had  cor- 
rectly returned  and  paid  its  tax,  and  moved  that  the  Government 's 
proof  of  debt  be  considered  and  rejected.  The  bankrupt  had  con- 
tracted with  a  number  of  manufacturers  of  moving  picture  films 
to  lease  their  films  at  a  rate  of  9  cents  per  foot.  In  addition  to  this 
flat  rate,  the  bankrupt  agreed  to  pay  to  the  manufacturers  the  bal- 
ance of  such  net  profits  remaining  after  deducting  a  dividend  of 
7%  on  its  preferred  stock  and  a  dividend  of  12%  on  its  common 
stock.  This  balance  of  net  profits  was  to  be  paid  to  and  appor- 
tioned among  the  manufacturers  according  to  the  number  of  feet 
of  film  furnished  by  each  manufacturer.  All  the  common  stock  of 
the  bankrupt  corporation  was  owned  by  the  manufacturers  who 
were  parties  to  this  contract. 

Questions:  (1)  May  the  bankruptcy  court  pass  on  the  valid- 
ity of  the  tax  in  the  first  instance  or  must  the  trustee  in  bankruptcy 
pay  the  tax  and  proceed  under  Rev.  Stat.  3226  ? 

(2)  Is  the  amount  over  and  above  the  flat  rate  which  the  bank- 
rupt paid  to  the  manufacturers  under  this  contract  a  payment  in 
the  nature  of  a  dividend  rather  than  a  payment  of  rent? 

Decision:  (1)  "We  regard  this  section  [Section  64a  of  the 
Bankruptcy  Act]  as  binding  upon  the  Government  because  it  is 
named  therein  and,  while  conferring  priority,  as  giving  the  bank- 


902  545  U.  S.  TAX  CASES 

ruptcy  court  the  power  to  hear  and  determine  any  question  that 
arises  as  to  the  amount  or  legality  of  a  tax  assessed  by  it.  The 
provision  applies  to  taxes  of  all  the  persons  mentioned,  and  we  could 
not  differentiate  the  Government  from  the  other  persons  in  the 
absence  of  language  justifying  it."  It  was  further  held  that  Sec- 
tion 3226,  U.  S.  Rev.  Stat.,  could  under  no  circumstances  apply  to 
this  case  because  the  trustee  is  not  seeking  to  maintain  a  suit  for 
the  recovery  of  internal  revenue  taxes  illegally  assessed,  and  did 
not  become  such  a  party  by  his  motion  to  reconsider  and  reject 
the  claim. 

(2)  "The  charge  of  nine  cents  a  foot  for  the  films  was  shown 
to  be  much  below  what  they  seem  to  have  been  worth,  and  the  addi- 
tional payment  was  not  to  be  made  to  the  manufacturers  in  propor- 
tion to  the  stock  they  held,  but  in  proportion  to  the  amount  of  film 
footage  each  had  furnished  the  bankrupt  during  the  year.  They 
furnished  different  amounts  and  were  entitled  to  their  proportion 
of  the  surplus  without  any  reference  to  the  amount  of  their  stock- 
holding or  even  if  they  held  no  stock  at  all. ' ' 

Accordingly,  the  court  refused  to  disturb  the  construction 
which  the  referee  and  the  court  below  put  upon  the  contract,  dis- 
allowing the  claim  of  the  United  States. 

GREINER,  EXECUTRIX  v.  LEWELLYN,  COLLECTOR 

(U.  S.  Supreme  Court,  April  10,  1922) 
(Not  yet  reported) 

Record :  Revenue  Act  of  1916.  In  error  to  the  District  Court 
for  the  Western  District  of  Pennsylvania  to  review  a  judgment  in 
favor  of  defendant  in  a  suit  against  the  collector  of  internal  revenue 
to  recover  part  of  an  amount  assessed  as  an  estate  tax.    Affirmed. 

Facts:  In  determining  the  net  value  of  the  estate  upon  the 
transfer  of  which  the  tax  was  imposed,  the  collector  had  included 
bonds  issued  by  political  subdivisions  of  the  state  of  Pennsylvania. 
The  executrix  claimed  that  to  include  these  municipal  bonds  was 
in  effect  to  tax  them, — ^which  the  Federal  government  is,  under  the 
Constitution,  without  power  to  do. 


545  U.  S.  TAX  CASES  903 

Question:  Has  Congress  power  to  require  that  state  and 
municipal  bonds  held  by  a  decedent  be  included  for  the  purpose  of 
determining  the  net  value  on  which  the  estate  tax  is  imposed? 

Decision :  The  estate  tax  imposed  by  the  Act  of  1916,  like  the 
earlier  legacy  or  succession  tax,  is  a  duty  or  excise,  and  not  a  direct 
tax,  like  that  on  income  from  municipal  bonds. 

The  Federal  government  may  impose  a  succession  tax  upon  a 
bequest  to  a  municipal  corporation  of  a  state  (Snyder  v.  Bettman, 
190  U.  S.  249),  or  may,  in  determining  the  amount  for  which  the 
estate  tax  is  assessable,  under  the  Act  of  1916,  include  sums  re- 
quired to  be  paid  to  a  state  as  inheritance  tax,  for  the  estate  tax  is 
the  antithesis  of  a  direct  tax.  New  York  Trust  Co.  v.  Eisner,  256 
U.  S.  34,  ante  370.  Municipal  bonds  of  a  state  stand  in  this  respect 
in  no  different  position  from  money  payable  to  it.  The  transfer 
upon  death  is  taxable,  whatsoever  the  character  of  the  property 
transferred  and  to  whomsoever  the  transfer  is  made. 

It  follows  that,  in  determining  the  amount  of  decedent's  real 
estate,  municipal  bonds  were  properly  included. 

HART  V.  TAX  COMMISSIONER 

(Sup.  Judicial  Court  of  Mass.,  Oct.  31,  1921) 
(132  N.  E.  621) 

Record:  Mass.  Income  Tax  Law,  St.  1916.  Suit  against  Tax 
Commissioner  for  abatement  of  income  tax.  Judgment  ordered  for 
plaintiff. 

Facts :  Complainant  was  a  resident  of  New  York  at  all  times 
prior  to  January  26,  1918.  She  then  became  a  resident  of  Massa- 
chusetts. Under  protest  she  filed  a  return  of  income  received  dur- 
ing 1917  and  paid  a  tax  assessed  thereon.  Section  12  of  the  Massa- 
chusetts Act  provides  that  the  return  shall  be  filed  and  the  tax 
paid  by  every  person  who  is,  at  any  time  between  January  1  and 
June  30,  of  the  year  following  the  taxable  year,  an  inhabitant  of 
the  commonwealth. 

~     Question:     May  a  state  legally  levy  a  tax  upon  income  re- 
ceived by  a  person  for  a  year  during  which  he  was  a  non-resident 


904  545  U.  S.  TAX  CASES 

of  that  state  where  such  person  becomes  a  resident  after  the  close 
of  the  taxable  year? 

Decision:  The  tax  in  question  is  not  an  excise  tax,  nor  is  it 
a  personal  property  tax.  "It  is  laid  directly  on  the  income  of  prop- 
erty, and  as  already  stated  is  in  reality  a  tax  on  the  property  itself 
•  *  *.  The  tax  in  question  was  essentially  one  on  property,  and 
not  an  excise. 

'  *  We  realize,  also,  that  the  law  as  to  the  situs  of  income  for  the 
purposes  of  taxation  is  not  yet  fully  developed.  But  in  view  of  the 
construction  placed  by  this  court  upon  the  income  tax  of  1916,  and 
the  fact  that  this  commonwealth  had  no  jurisdiction  over  the  per- 
son, property  or  business  of  the  complainant  during  the  year  1917, 
we  are  of  the  opinion  that  the  tax  in  question  was  invalid, ' ' 

HATTIESBURY  GROCERY  CO.  v.  ROBERTSON 

(Supreme  Court  of  Miss.,  April  18,  1921) 
(88  So.  4) 

Record:  Mississippi  Income  Tax  Act  and  State  Constitution. 
Suit  to  recover  income  taxes  alleged  to  be  due  from  defendant  cor- 
poration to  the  state.  Judgment  for  plaintiff  after  appeal  from  a 
justice  of  the  peace  and  defendant  appeals.    Affirmed. 

Facts:  The  statute,  under  which  the  tax  in  question  was 
sought  to  be  collected,  imposes  a  tax  on  all  incomes  with  certain 
exceptions  in  excess  of  $2,500.  Section  112  of  the  State  Constitu- 
tion provides  that  property  shall  be  taxed  in  proportion  to  its  value 
and  shall  be  assessed  for  taxes  under  general  rules  and  by  uniform 
rules  according  to  its  true  value. 

Question:  Is  an  income  tax  a  tax  on  property  within  the 
meaning  of  Section  112  of  the  State  Constitution  and  hence  invalid 
as  in  conflict  with  the  requirements  of  that  section? 

Decision:  A  tax  on  income  is  in  the  last  analysis  simply  a 
portion  cut  from  the  income  and  appropriated  by  the  state  as  its 
share  thereof,  and,  while  it  includes  some  of  the  elements  both  of 
a  tax  on  property  and  of  a  tax  on  persons,  it  cannot  be  strictly 
classified  as  a  tax  on  either,  for  it  is  generally  and  necessarily  an 
excise.    Section  112  of  the  Constitution  contains  no  language  even 


545  U.  S.  TAX  CASES  905 

remotely  indicating  that  its  purpose  is  to  withdraw  from  the  Legis- 
lature the  power  to  tax  any  species  of  property  or  any  of  the  activ- 
ities of  persons  who  enjoy  the  protection  of  the  state's  laws.  Sec- 
tion 112  was  adopted  to  prevent  discrimination  in  the  taxation  of 
property  and  an  income  tax  does  not  violate  this  principle. 

HILL  V.  WALLACE,  SECRETAEY  OF  AGRICULTURE,  et  al. 

(U.  S.  Supreme  Court,  October  Term,  1921) 

(Not  yet  reported) 

Record :  Future  Trading  Act,  approved  August  24,  1921.  In 
equity.  Decree  of  District  Court  reversed  and  case  remanded  for 
further  proceedings. 

Facts :  This  bill  was  filed  by  eight  members  of  the  Board  of 
Trade  of  the  City  of  Chicago,  who  sue  in  behalf  of  all  other  mem- 
bers who  may  wish  to  join  against  the  Secretary  of  Agriculture, 
the  Commissioner  of  Internal  Revenue,  United  States  District  At- 
torney for  the  Northern  District  of  Illinois,  the  Collector  of  Inter- 
nal Revenue  for  the  first  district  of  that  State,  the  Board  of  Trade 
of  the  City  of  Chicago,  its  President,  Vice-President  and  Director. 
The  bill  avers  that  the  complainants  applied  to  the  directors  of  the 
Board  of  Trade  to  institute  a  suit  to  have  the  Future  Trading  Act 
adjudged  unconstitutional  before  they  should  comply  with  it,  but 
the  board  of  directors  refused  to  take  any  steps  and  announced 
that  they  intended  to  comply  with  the  provisions  of  the  Act.  The 
bill  alleges  that  the  Act  in  question  is  unconstitutional  and  prays 
for  an  injunction  against  the  Secretary  of  Agriculture  to  prevent 
him  from  compelling  the  Board  to  comply  with  its  provisions, 
against  the  Commissioner  and  Collector  and  District  Attorney  from 
attempting  to  collect  any  tax,  penalty,  or  fine  under  the  Act,  and 
against  the  Board  of  Trade  and  its  officers  from  taking  any  steps 
to  comply  with  the  Act. 

Questions:  (1)  Assuming  the  Act  to  be  invalid,  have  com- 
plainants on  the  face  of  their  bill  stated  sufficient  equitable  grounds 
to  justify  granting  the  relief  asked? 

(2)  Is  this  a  suit  for  an  injunction  against  the  collection  of  a 
tax  in  violation  of  Section  3224  R.  S.  insofar  as  it  seeks  relief 
against  the  District  Attorney  and  Collector  of  Internal  Revenue? 


906  545  U.  S.  TAX  CASES 

(3)  Is  the  Act  a  valid  exercise  of  the  taxing  power  of  Congress? 

(4)  Can  these  regulations  of  Boards  of  Trade  by  Congress  be 
sustained  under  the  commerce  clause  of  the  Constitution  V 

(5)  Part  of  the  Act  being  invalid,  what  sections  will  stand  by 
virtue  of  the  saving  provisions  in  Section  11  ? 

Decision:  (1)  "We  think  it  clear  that,  within  the  cases  of 
Smith  V.  Kansas  City  Title  &  T.  Company,  255  U.  S.  180 ;  Brushaber 
v.  Union  Pacific  R.  Co.,  240  U.  S.  1,  10 ;  PoUock  v.  Farmers  Loan  & 
Trust  Co.,  157  U.  S.  429,  and  Dodge  v.  Woolsey,  18  Howard  331, 
341,  346,  the  averments  of  the  bill  entitle  them  to  relief  against  the 
Board  of  Trade  of  Chicago,  its  president  and  its  directors.  The 
bills  shows  that  the  Act,  if  enforced,  will  seriously  injure  the  value 
of  the  Board  of  Trade  to  its  members,  and  the  pecuniary  value  of 
their  memberships.  If  the  law  be  unconstitutional,  then  it  was  the 
duty  of  the  Board  of  Directors  to  bring  an  action  to  resist  its 
enforcement. ' ' 

(2)  "It  has  been  held  by  this  Court,  in  Dodge  v.  Brady,  240 
U.  S.  122,  126,  that  section  3224  of  the  Revised  Statutes  does  not 
prevent  an  injunction  in  a  case  apparently  within  its  terms  in 
which  some  extraordinary  and  entirely  exceptional  circumstances 
make  its  provisions  inapplicable.  See  also  Dodge  v.  Osborn,  240 
U.  S.  118,  122.  In  the  case  before  us,  a  sale  of  grain  for  future 
delivery  without  paying  the  tax  will  subject  one  to  heavy  criminal 
penalties.  To  pay  the  heavy  tax  on  each  of  many  daily  transac- 
tions which  occur  in  the  ordinary  business  of  a  member  of  the  ex- 
change, and  then  sue  to  recover  it  back,  would  necessitate  a  multi- 
plicity of  suits,  and,  indeed,  would  be  impracticable.  For  the  Board 
of  Trade  to  refuse  to  apply  for  designation  as  a  contract  market, 
in  order  to  test  the  validity  of  the  Act,  would  stop  its  1,600  mem- 
bers in  a  branch  of  their  business  most  important  to  themselves  and 
to  the  country.  We  think  these  exceptional  and  extraordinary  cir- 
cumstances with  respect  to  the  operation  of  this  Act  make  section 
3224  inapplicable.  The  right  to  sue  for  an  injunction  against  the 
taxing  officials  is  not,  however,  necessary  to  give  us  jurisdiction.  If 
they  were  to  be  dismissed  under  section  3224,  the  bill  would  still 
raise  the  question  here  mooted  against  the  Board  of  Trade  and  its 
directors.     The  Solicitor  General  has  appeared  on  behalf  of  the 


545  U.  S.  TAX  CASES  907 

Government,  and  argued  the  case  in  full  on  all  the  issues.  Our 
conclusion  as  to  the  validity  of  the  Act  will,  therefore,  have  the 
same  effect  as  did  the  judgment  of  the  court  in  respect  to  the  in- 
come tax  law  in  Pollock  v.  Farmers  Loan  &  Trust  Co.,  157  U.  S. 
429,  to  which  the  Government  was  not  a  party,  but  in  which  the 
Attorney  General,  on  its  behalf,  was  heard  as  amicus  curiae." 

(3)  "It  is  impossible  to  escape  the  conviction,  from  a  full 
reading  of  this  law,  that  it  was  enacted  for  the  purpose  of  regulat- 
ing the  conduct  of  business  of  boards  of  trade  through  supervision 
of  the  Secretary  of  Agriculture  and  the  use  of  an  administrative 
tribunal  consisting  of  that  Secretary,  the  Secretary  of  Commerce, 
and  the  Attorney  General.  Indeed,  the  title  of  the  Act  recites  that 
one  of  its  purposes  is  the  regulation  of  boards  of  trade.  As  the 
bill  shows,  the  imposition  of  20  cents  a  bushel  on  the  various  grains 
affected  by  the  tax  is  most  burdensome.  The  tax  upon  contracts 
for  sales  for  future  delivery  under  the  revenue  act  is  only  2  cents 
upon  $100  of  value,  whereas  this  tax  varies,  according  to  the  price 
and  character  of  the  grain,  from  15  per  cent  of  its  value  to  50  per 
cent.  The  manifest  purpose  of  the  tax  is  to  compel  boards  of  trade 
to  comply  with  regulations,  many  of  which  can  have  no  relevancy 
to  the  collection  of  the  tax  at  all.  *  •  •  The  act  is  in  essence 
and  on  its  face  a  complete  regulation  of  boards  of  trade,  with  a 
penalty  of  20  cents  a  bushel  on  all  'futures'  to  coerce  boards  of 
trade  and  their  members  into  compliance.  When  this  purpose  is 
declared  in  the  title  to  the  bill,  and  is  so  clear  from  the  effect  of 
the  provisions  of  the  bill  itself,  it  leaves  no  ground  upon  which  the 
provisions  we  have  been  considering  can  be  sustained  as  a  valid 
exercise  of  the  taxing  power.  ♦  *  *  Our  decision,  May  15, 
1922,  in  Bailey  v.  Drexel  Furniture  Co.,  involving  the  consti- 
tutional validity  of  the  Child  Labor  Tax  Law,  completely  covers 
this  case." 

(4)  "We  come  to  the  question,  then.  Can  these  regulations  of 
boards  of  trade  by  Congress  be  sustained  under  the  commerce  clause 
of  the  Constitution?  Such  regulations  are  held  to  be  within  the 
police  powers  of  the  state.  House  v.  Mayes,  219  U.  S.  270 ;  Broad- 
nax  V.  Missouri,  219  U.  S.  285.  There  is  not  a  word  in  the  act  from 
which  it  can  be  gathered  that  it  is  confined  in  its  operation  to 


908  545  U.  S.  TAX  CASES 

interstate  commerce.  The  words  'interstate  commerce'  are  not  to 
be  found  in  any  part  of  the  act,  from  the  title  to  the  closing  sec- 
tion. The  transactions  upon  which  the  tax  is  to  be  imposed,  the 
bill  avers,  are  sales  made  between  members  of  the  Board  of  Trade 
in  the  City  of  Chicago,  for  future  delivery  of  grain,  which  will  be 
settled  by  the  process  of  offsetting  purchases  or  by  a  delivery  of 
warehouse  receipts  of  grain  stored  in  Chicago.  Looked  at  in  this 
aspect,  and  without  any  limitation  of  the  application  of  the  tax  to 
interstate  commerce,  or  to  that  which  the  Congress  may  deem,  from 
evidence  before  it,  to  be  an  obstruction  to  interstate  commerce,  we 
do  not  find  it  possible  to  sustain  the  validity  of  the  regulations  as 
they  are  set  forth  in  this  act.  A  reading  of  the  act  makes  it  quite 
clear  that  Congress  sought  to  use  the  taxing  power  to  give  validity 
to  the  act.  It  did  not  have  the  exercise  of  its  power  under  the 
commerce  clause  in  mind,  and  so  did  not  introduce  into  the  act  the 
limitations  which  certainly  would  accompany  and  mark  an  exer- 
cise of  the  power  under  the  latter  clause. 

*  *  It  follows  that  sales  for  future  delivery  on  the  Board  of  Trade 
are  not,  in  and  of  themselves,  interstate  commerce.  They  can  not 
come  within  the  regulatory  power  of  Congress  as  such,  unless  they 
are  regarded  by  Congress,  from  the  evidence  before  it,  as  directly 
interfering  with  interstate  commerce  so  as  to  be  an  obstruction 
or  a  burden  thereon.  United  States  v.  Ferger,  250  U.  S.  199." 
(Cases  of  Stafford  v.  Wallace,  decided  May  1,  1922;  United  States 
v.  Patten,  226  U.  S.  525,  and  Swift  &  Co.  v.  United  States,  196 
U.  S.  375,  cited  and  distinguished. )  * '  But  the  form  and  limitations 
of  the  act  before  us  form  no  such  basis  as  those  cases  presented  for 
Federal  jurisdiction  and  the  exercise  of  the  power  to  protect  inter- 
state commerce.  Our  conclusion  makes  it  necessary  for  us  to  hold 
section  4,  and  those  parts  of  the  act  which  are  regulations  affected 
by  the  so-called  tax  imposed  by  section  4,  to  be  unenforceable. '  * 

(5)  "Section  4,  with  its  penalty  to  secure  compliance  with 
the  regulations  of  boards  of  trade,  is  so  interwoven  with  those  regu- 
lations that  they  can  not  be  separated.  None  of  them  can  stand. 
Section  11  did  not  intend  the  court  to  dissect  an  unconstitutional 
measure  and  reframe  a  valid  one  out  of  it  by  inserting  limitations 
it  does  not  contain.     •     •     •     There  are  sections  of  the  act  to 


545  U.  S.  TAX  CASES  909 

which,  under  section  11,  the  reasons  for  our  conclusion  as  to  section 
4  and  the  interwoven  regulations  do  not  apply.  Such  is  section  9, 
authorizing  investigations  by  the  Secretary  of  Agriculture  and  his 
publication  of  results.  Section  3,  too,  would  not  seem  to  be  affected 
by  our  conclusion. 

"The  injunction  against  the  Board  of  Trade  and  its  officers, 
and  the  injunction  against  the  Collector  of  Internal  Revenue  and 
the  District  Attorney,  should  be  granted,  so  far  as  section  4  is  con- 
cerned and  the  regulations  of  the  act  interwoven  within  it.  The 
court  below  acquired  no  personal  jurisdiction  of  the  Secretary  of 
Agriculture  and  the  Commissioner  of  Internal  Revenue  by  proper 
service,  and  the  dismissal  as  to  them  was  right." 

HOME  INSURANCE  COMPANY  v.  NEW  YORK  STATE 

(U.  S.  Supreme  Court,  April  7,  1890) 
(134  U.  S.  594) 

Record:  Corporation  tax  law  of  New  York,  passed  May  26, 
1881,  c.  361.  Agreed  case  to  determine  plaintiff's  liability  for  tax. 
Error  to  the  Court  of  Appeals  of  New  York  which  gave  judgment 
in  favor  of  the  State.    Judgment  affirmed. 

Facts:  The  State  assessed  a  tax  of  $7,500  against  the  plain- 
tiff under  a  statute  providing  that  every  corporation  therein  enu- 
merated should  be  subject  to  a  tax  upon  "its  corporate  franchise 
or  business,"  computed  by  the  extent  of  the  dividends  upon  its 
capital  stock.  The  company  resisted  payment  of  the  tax,  assuming 
that  it  was  in  fact  levied  upon  capital  stock,  and  contending  that 
the  tax  should  be  reduced  in  proportion  to  the  amount  which  the 
company  had  invested  in  U.  S.  Bonds. 

Question:  Was  the  tax  upon  the  capital  stock  of  the  corpo- 
ration invalid  so  far  as  bonds  of  the  United  States  constituted  a 
part  of  that  stock? 

Decision:  "In  this  case  we  hold,  as  well  upon  general  prin- 
ciples as  upon  the  authority  of  the  first  two  cases  cited  from  6th 


910  545  U.  S.  TAX  CASES 

Wallace,  that  the  tax  for  which  the  suit  is  brought  is  not  a  tax 
upon  the  capital  stock  or  property  of  the  company,  but  upon  its 
corporate  franchise,  and  is  not  therefore  subject  to  the  objection 
stated  by  counsel,  because  a  portion  of  its  capital  stock  is  invested 
in  securities  of  the  United  States." 

HURST  V.  LEDERER,  COLLECTOR 

(U.  S.  Circuit  Court  of  Appeals,  Third  Cir.,  June  3,  1921) 

(273  Fed.  174) 

Record :  Act  of  March  1, 1879,  chapter  125,  section  2.  Action 
to  recover  taxes  collected  under  protest.  In  error  to  District  Court 
where  a  judgment  was  entered  for  defendant.    Affirmed. 

Facts :  The  alleged  illegality  of  the  collection  consisted  in  the 
fact,  asserted  by  Hurst,  that  he  had  already  paid  the  tax  to  the 
collector  by  a  payment  thereof  made  to  one  Wright  a  deputy  col- 
lector of  Lederer,  the  defendant.  The  proof  showed  that  on  the 
day  the  taxes  were  payable.  Hurst  telephoned  to  Lynch,  a  friend  of 
his  in  the  Post  Office  Department,  and  inquired  about  the  number 
of  people  who  were  waiting  to  pay  taxes.  Lynch  told  him  it  was 
large  but  that  he  would  get  him  inside  the  railings.  Lynch  took 
Hurst  to  the  desk  of  Wright,  a  deputy  collector.  There  was  a  con- 
flict in  testimony  as  to  whether  the  money  was  given  to  Wright  or 
left  on  the  desk  of  one  Betts,  who  was  the  deputy  "in  charge  of  the 
district  where  Hurst's  place  was."  The  court  assumed  that  there 
was  sufficient  evidence  for  the  jury  to  find  that  Wright  got  the 
money.  No  proof  of  Wright's  authority  to  receive  the  money  was 
adduced  and  the  only  statutory  authority  cited  was  the  Act  of 
March  1,  1879,  granting  power  to  collectors  to  appoint  deputies  and 
also  providing  that  * '  each  such  deputy  shall  have  the  like  authority 
in  every  respect  to  collect  the  taxes  levied  or  assessed  within  the 
portion  of  the  district  assigned  to  him  which  is  by  law  vested  in  the 
collector  himself." 

Question:  Is  a  deputy  collector  authorized  by  law  to  receive 
payments  of  taxes  which  are  not  levied  or  assessed  within  the  por- 
tion of  the  district  assigned  to  him? 


545  U.  S.  TAX  CASES  911 

Decision :  This  suit  being  to  recover  taxes  illegally  collected, 
the  burden  of  showing  a  previous  payment  rested  on  the  plaintiff, 
and  inasmuch  as  the  proof  was  that  Lederer  had  never  received  the 
money,  and  had  never  authorized  "Wright  to  receive  it  for  him,  it  is 
apparent  Hurst  has  not  made  out  a  case  against  Lederer,  unless  the 
law  itself  makes  Lederer 's  appointment  of  "Wright  as  deputy  col- 
lector carry  with  it  the  right  and  authority  to  collect  money.  The 
court  then  referred  to  the  Act  of  March  1,  1879,  and  concluded  that 
the  plaintiff  cannot  justify  his  alleged  payment  to  "Wright  by  the 
terms  of  the  statute  since  Betts  was  the  deputy  to  whom  alone  the 
language  of  that  statute  could  apply.  In  the  absence  of  Betts  ' '  the 
cashier  was  the  only  person  to  whom  Hurst  could  pay  his  money, 
so  as  to  bind  Lederer. ' ' 

IN  RE  INMAN'S  ESTATE 

PAULSEN  et  al.  v.  HOFF,  STATE  TREASURER 

(Supreme  Court  of  Oregon,  July  19,  1921) 

(199  Pac.  615) 

Record :  Oregon  Inheritance  Tax  Law.  The  executors  of  the 
Estate  of  Inman,  deceased,  filed  a  petition  to  determine  the  amount 
of  inheritance  taxes  to  be  paid  the  state ;  and  from  a  decree  denying 
a  deduction  from  the  assessment,  they  appeal.    Modified. 

Facts :  In  their  petition  the  executors  asked  that  the  Federal 
estate  tax  be  deducted,  before  calculating  the  amount  of  the  state 
inheritance  tax.  The  court  refused  to  deduct  the  amount  of  the 
federal  estate  tax  and  the  executors  appealed. 

Question :  Should  the  federal  estate  tax  be  deducted  from  the 
gross  value  of  the  estate  before  calculating  the  amount  of  the  state 
inheritance  tax  ? 

Decision:  "So  far  as  we  have  been  able  to  discover,  every 
reported  judicial  opinion  which  recognizes  and  observes  the  well 
defined  and  universally  acknowledged  distinction  between  an  estate 
tax  and  an  inheritance  tax  is  to  the  effect  that  the  federal  estate  tax 
must  be  deducted  before  measuring  the  amount  of  the  state  inherit- 
ance tax  unless,  however,  some  peculiar  and  unusual  language 
appearing  in  the  state  statute  controls  and  produces  a  different 
result." 


912  545  U.  S.  TAX  CASES 

'  *  The  federal  estate  tax  should  have  been  deducted  before  meas- 
uring the  amount  of  the  state  inheritance  tax." 

KAHN  et  al.,  EXECUTORS  v.  UNITED  STATES 

(U.  S.  Supreme  Court,  Dec.  5,  1921) 
(Not  yet  reported) 

Record :  Act  of  June  13,  1898,  and  Acts  of  June  27, 1902,  and 
of  July  27,  1902.  Appeal  from  the  Court  of  Claims  to  review  a 
judgment  which  dismissed  a  petition  for  a  refund  of  succession 
taxes.    Affirmed.    See  same  case  below,  55  Ct.  CI.  271. 

Facts:  This  suit  was  brought  to  have  refunded  $58,885.98 
paid  in  taxes  assessed  upon  legacies  under  the  Act  of  June  13, 1898. 
The  decedent.  Wolf,  died  on  October  1,  1900.  He  provided  by  will 
for  fifteen  separate  trusts,  the  income  of  each  to  be  payable  for  life 
to  the  beneficiaries.  The  amount  or  value  of  the  fifteen  trusts  was 
ascertained  before  July  1,  1902.  None  of  the  funds  directed  to  be 
paid  to  the  trustees  had  been  paid  to  them,  or  set  apart  or  estab- 
lished by  that  date ;  but  no  reason  was  shown  why  they  should  not 
have  been.  The  value  of  the  estate  was  over  $7,000,000,  and  the 
total  amount  of  the  fifteen  trusts  was  $730,000,  and  it  was  known 
before  July  1,  1902,  that  no  controversy  or  outstanding  claim  could 
affect  the  value  of  any  but  the  residuary  legacies.  The  will  was 
admitted  to  probate  and  letters  testamentary  issued  on  November 
7,  1900.  Publication  of  notice  to  creditors  was  begun  on  November 
7, 1900,  and  on  August  8, 1901,  the  court  entered  an  order  declaring 
that  creditors  who  had  neglected  to  file  claims  were  barred.  On 
July  1,  1902,  the  only  unadjusted  matters  were  claims  for  taxes  for 
relatively  small  sums. 

Question:  Were  the  legacies  contingent  beneficial  interests, 
not  vested  in  possession  or  enjoyment  on,  or  prior  to,  July  1,  1902, 
so  that  the  amount  paid  as  taxes  upon  such  legacies  is  recoverable 
under  the  Acts  of  June  27,  1902,  and  of  July  27,  1902  ? 

Decision:  The  beneficial  interests  were  contingent  unless  the 
legatees  were  on  July  1,  1920,  in  actual  possession  or  enjoyment  or 
were  entitled  to  immediate  possession  or  enjoyment.  The  mere 
failure  of  executors  to  establish  the  trust  fund  will  not  prevent  the 


545  U.  S.  TAX  CASES  913 

vesting  of  a  legacy,  if,  under  the  state  law,  the  time  for  payment 
has  come,  the  right  thereto  is  uncontroverted,  and  it  is  clear  that  the 
money  retained  will  not  be  needed  to  satisfy  outstanding  claims.  On 
July  1,  1902,  the  trustees  were  entitled  to  the  possession  of  the 
funds,  and  all  the  beneficiaries  to  the  immediate  enjoyment  of  the 
income  thereof,  with  the  exception  of  the  amount  involved  in  con- 
troversies over  taxes.  The  executors  might  then  have  paid  over  the 
balance  of  the  estate  in  their  hands  to  the  trustees,  retaining  funds 
sufficient  to  satisfy  the  claims  in  dispute.  The  amount  on  which 
the  taxes  here  in  question  were  assessed  is  not  shown  to  have 
exceeded  the  amount  of  such  balance. 

The  beneficial  interests  were,  therefore,  vested ;  and  taxes  were 
properly  assessed  thereon. 

KELLY  V.  LEWELLYN,  COLLECTOR 

(U.  S.  Dist.  Court,  W.  D.  Penn.,  May  Term,  1921) 
(274  Fed.  108) 

Record:  Volstead  Act  and  R.  S.  Sec.  3224.  In  equity.  On 
motion  to  dismiss  bill.    Motion  granted. 

Facts :  This  bill  seeks  to  restrain  the  collector  from  collecting 
a  certain  tax  and  penalty  assessed  against  the  plaintiff,  under  the 
provisions  of  section  35  of  title  2  the  Volstead  Act.  The  bill  denies 
the  sale  of  any  intoxicating  liquors,  and  alleges  that  the  defendant 
had  no  notice  of  the  levy  or  assessment  of  the  tax  and  penalty ;  that 
he  filed  with  the  collector  an  affidavit  to  that  effect  and  asked  abate- 
ment of  the  tax  and  penalty,  which  request  was  refused,  and  pay- 
ment in  full  demanded,  and  that  otherwise  his  property  would  be 
seized  and  sold ;  that  said  assessment  and  levy  is  without  warrant  of 
law ;  and  that  he  is  entitled  to  injunctive  relief. 

Question:  Was  the  amount  assessed  a  tax,  within  the  taxing 
power  of  Congress,  so  that  its  collection  cannot  be  enjoined  by  rea- 
son of  R.  S.  3224,  which  provides  that  "no  suit  for  the  purpose  of 
restraining  the  assessment  or  collection  of  any  tax  shall  be  main- 
tained in  any  court ' '  ? 

Decision :  The  court  pointed  out  that  in  License  Tax  Cases,  5 
Wall.  462,  it  was  held  by  the  Supreme  Court  that  unlawful  sales  of 


914  545  U.  S.  TAX  CASES 

liquor  in  a  state  where  prohibition  existed  could  be  the  basis  for  the 
collection  of  federal  revenue  taxes.  "If  Congress  can  thus  impose 
taxes  for  the  carrying  on  of  a  business  prohibited  by  the  laws  of  the 
state,  on  the  ground  that  the  unlawful  business  is  thereby  dis- 
couraged, may  not  Congress,  on  the  same  ground  and  for  the  same 
reason,  impose  taxes  on  the  unlawful  carrying  on  of  a  business  pro- 
hibited by  the  national  constitution,  and  the  act  of  Congress  passed 
for  its  enforcement?"  The  court  came  to  the  conclusion  that  the 
imposition  of  the  tax  in  question  was  within  the  lawful  power  of 
Congress  and  that  it  could  not  inquire  either  as  to  the  wisdom  or 
justice  of  the  imposition. 

The  court  also  held  that  even  if  it  be  admitted  that  part  of  the 
sum  demanded  of  the  complainant  by  the  collector  were  a  penalty, 
that  it  was  the  duty  of  plaintiff  to  pay  all  such  sums  as  are  in  sec- 
tion 35  specifically  denominated  "taxes."  The  case  of  Kausch  v. 
Moore,  268  Fed.  668,  ante  280,  was  cited  and  relied  on. 

"As  payment  or  tender  of  all  taxes  demanded  is  a  condition 
precedent  to  an  application  for  injunctive  relief,  the  bill  must  be 
dismissed. '  * 

KELLY  V.  LEWELLYN,  COLLECTOR 

(U.  S.  Dist.  Court,  W.  D.  Penn,  May  Term  1921) 
(274  Fed.  112) 

Record :  National  Prohibition  Act  and  R.  S.  3224.  In  Equity. 
On  motion  to  dismiss  bill.    Motion  overruled. 

Facts :  This  bill  was  filed  to  restrain  the  defendant  from  seiz- 
ing property  of  the  plaintiff  and  subjecting  it  to  the  payment  of  the 
penalty  provided  in  title  2  sec.  35  of  the  National  Prohibition  Act. 
The  plaintiff  sets  forth  in  his  bill,  at  considerable  length,  averments 
which,  if  true,  would  relieve  him  from  all  liability  under  said  sec- 
tion. In  addition,  thereto,  he  sets  forth  that,  after  a  previous  bill 
had  been  filed  by  him  to  enjoin  the  collection  of  both  the  taxes  and 
the  penalty  mentioned  in  said  section,  this  court  refused  the  prayer 
of  said  bill  because  the  plaintiff  had  not  averred  that  he  had  paid 
the  taxes  required  to  be  assessed  by  said  section.  See  274  Fed.  108. 
In  the  present  bill  he  sets  forth  that  he  has  paid  the  taxes  assessed 


545  U.  S.  TAX  CASES  915 

against  him  in  double  the  amount  as  required  by  the  Act,  but  that, 
notwithstanding  such  payment,  the  defendant  is  proceeding  to  col- 
lect the  penalty  imposed  by  said  section. 

Question :  Can  the  court  restrain  the  collection  of  the  penalty 
imposed  by  sec.  35  of  title  2  of  the  National  Prohibition  Act  ? 

Decision :  * '  I  am  satisfied  that  Congress  has  not  placed  in  the 
hands  of  the  collector  of  revenue  the  power  to  collect,  by  distress 
and  sale,  the  penalties  provided  for  in  the  said  section  of  the 
National  Prohibition  Act.  This  same  question  has  been  before 
courts  in  other  jurisdictions,  and  decided  in  favor  of  the  plaintiff, 
where  similar  bills  have  been  filed."  See  Accardo  v.  Fontenot, 
269  Fed.  447. 

"The  motion  to  dismiss  the  bill  must  be  overrruled." 

KNOX  V.  McELLIGOTT,  COLLECTOR 

(U.  S.  Supreme  Court,  May  1,  1922) 
(Not  yet  reported) 

Record:  Estate  Tax  Act  of  September  8,  1916.  Action  to 
recover  taxes  paid  under  protest.  In  error  to  U.  S.  Circuit  Court  of 
Appeals,  Second  Circuit,  to  review  a  judgment  which  reversed  a 
judgment  of  the  District  Court,  Southern  District  of  New  York,  in 
favor  of  the  plaintiff.  275  Fed.  545,  ante  340.  Reversed  and  re- 
manded for  further  proceedings. 

Facts:  In  1912  the  decedent  conveyed  certain  securities  to 
the  plaintiff,  who,  shortly  thereafter  reconveyed  the  same  to  the 
decedent  and  his  wife  as  joint  tenants.  In  1917  the  decedent  died, 
leaving  his  widow  surviving  him,  and  she  and  the  plaintiff  were 
made  executors  of  the  estate.  In  making  the  estate  tax  return,  the 
plaintiff  included  the  value  of  one-half  of  the  jointly  owned  prop- 
erty which  was  owned  and  enjoyed  by  decedent,  but  did  not  include 
the  value  of  the  one-half  of  the  jointly  owned  property  which  had 
been  owned  and  enjoyed  by  the  widow  since  the  creation  of  the  joint 
estate  in  1912.  The  Commissioner  added  to  the  estate  the  half 
interest  not  returned  by  the  plaintiff,  and  assessed  an  additional 
tax  of  $15,668.60,  which  the  plaintiff  paid  to  the  defendant  collector. 


916  545  U.  S.  TAX  CASES 

Question :  Was  the  estate  tax  law  of  September  8,  1916,  retro- 
active, so  as  to  apply  to  a  transfer  made  prior  to  its  passage  ? 

Decision :  This  case  is  governed  by  the  decision  in  Shwab  v. 
Doyle,  post  this  volume. 

IN  RE  KUETER'S  ESTATE 
STATE  et  al.  v.  KUETER  et  al. 

(Supreme  Court  of  S.  D.,  March  31,  1922) 
(187  N.  W.  625) 

Record :  South  Dakota  Inheritance  Tax  Act.  Appeal  from  an 
order  entered  in  favor  of  State  Tax  Commission  in  a  proceeding  to 
collect  an  inheritance  tax.    Judgment  and  order  reversed. 

Facts:  The  decedent,  four  days  prior  to  his  death,  conveyed 
to  each  of  six  children  a  quarter  section  of  land.  Each  deed  was  for 
a  nominal  consideration.  The  evidence  showed  that,  some  10  or  12 
years  prior  to  his  death  the  deceased  owned  a  farm  of  480  acres; 
that  at  about  that  time  he  was  compelled  to  abandon  farm  work 
because  of  ill  health ;  that  he  then  called  his  children  together  and 
advised  them  of  his  condition,  and  also  told  them  that  if  they  would 
stay  and  work  on  the  farm  and  turn  over  to  him  the  proceeds  he 
would  use  the  proceeds  to  buy  more  land  until  he  had  acquired  a 
quarter  section  for  each,  when  he  would  deed  to  each  child  a  quarter 
section;  that  the  children  agreed  to  the  proposition;  and  that  the 
deeds  made  by  the  deceased  were  made  in  performance  of  the  agree- 
ment on  his  part  which  had  been  fulfilled  by  the  children  on  their 
part. 

Question:  Were  the  transfers  in  question  made  "in  contem- 
plation of  death ' '  within  the  meaning  of  the  statute  ? 

Decision:  The  phrase  "in  contemplation  of  death"  refers  to 
transfers  made  when  the  donor  is  looking  forward  to  death  as 
impending,  and  in  view  of  that  event.  There  was  no  evidence  show- 
ing what  the  age  of  the  deceased  was,  or  that  he  believed  or  had  any 
idea  that  he  was  near  death.  There  is  nothing  to  indicate  that  his 
condition  was  worse  or  different  from  what  it  had  been  for  the  past 
10  years,  except,  of  course,  that  he  was  10  years  older.  There  was 
nothing  whatever  to  indicate  that  he  thought  death  was  impending. 


545  U.  S.  TAX  CASES  917 

*  *  In  our  opinion  the  evidence  affirmatively  shows  that  the  deeds 
were  not  executed  in  contemplation  of  death     *     *     * " 

LAEMMLE  v.  EISNER,  EX-COLLECTOR 

(U.  S.  District  Court,  S.  D.  New  York,  August  9,  1920) 

(275  Fed.  504) 

Record:  Revenue  Act  of  1913.  Action  to  recover  additional 
taxes,  with  interest  and  penalties,  paid  by  plaintiff,  not  under  pro- 
test.   Verdict  directed  for  defendant,  and  against  plaintiff. 

Facts :  Plaintiff,  on  May  5,  1913,  controlled  a  majority  of  the 
stock  of  the  Universal  Film  Mfg.  Co.  On  the  same  date,  David 
Horsley,  a  stockholder,  entered  into  an  agreement  with  one  Powers 
giving  the  latter  an  option  to  purchase  the  stock  owned  by  Horsley. 
On  June  7,  1913,  while  the  option  agreement  was  still  apparently 
in  effect,  and  before  a  formal  exercise  thereof  on  the  part  of  Powers, 
a  part  of  the  Horsley  stock  was,  apparently  through  collusion  of 
officers  of  the  corporation,  transferred  to  the  name  of  Powers  on 
the  books  of  the  company.  When  the  plaintiff  learned  of  this  trans- 
action, he  purchased  from  Horsley  the  stock  owned  by  the  latter.  In 
the  agreement  of  sale  between  the  plaintiff  and  Horsley  the  option 
agreement  with  Powers  was  expressly  referred  to  and  the  plaintiff 
agreed  to  defend  Horsley  against  any  suit  by  Powers  for  breach  of 
this  agreement  and  to  pay  any  judgment  which  the  latter  might 
recover.  This  transaction  took  place  on  June  11,  1913,  and  the 
plaintiff's  contention  is  that  he  was  advised  and  believed  that  the 
prior  option  agreement  was  void.  On  June  13,  1913,  Powers  for- 
mally exercised  the  option  and,  being  unable  to  secure  the 
stock,  on  July  24,  1913,  brought  suit  against  the  plaintiff  and  the 
Universal  Film  Mfg.  Co.  to  have  himself  declared  the  owner  of  the 
Horsley  stock.  Plaintiff  was  represented  by  counsel  in  this  litiga- 
tion, but  no  trial  was  ever  had,  a  settlement  having  been  reached  on 
December  30,  1914.  The  action  was  discontinued  on  January  15, 
1915.  Plaintiff  paid  his  attorneys  $7,500  in  1914,  and  $51,700  in 
1915  for  their  services  in  this  action.  These  amounts  were  deducted 
by  the  plaintiff  in  his  income  tax  return  for  the  years  1914  and  1915. 
The  deduction  was  disallowed  and  the  plaintiff  was  obliged  to  pay 
additional  taxes  with  interest  and  penalties.    Upon  the  rejection  of 


918  545  U.  S.  TAX  CASES 

claims  for  refund,  this  action  was  brought  to  recover  the  amount  of 
the  additional  taxes  so  assessed  and  collected. 

Question:  Were  the  attorneys'  fees  paid  by  the  plaintiff 
proper  deductions  in  computing  his  net  income  subject  to  federal 
income  taxes? 

Decision :  ' '  After  a  full  consideration  of  the  facts  of  this  case, 
I  am  constrained  to  the  view  that  the  sum  of  attorneys'  fees  paid 
in  the  litigation  for  the  mastery  of  the  Horsley  stock,  resulting  in 
practically  the  ownership  or  control  thereof  and  the  consequent 
management  of  the  company,  under  the  facts  and  circumstances 
disclosed  by  the  record,  constituted  a  capital  investment,  and  not  a 
'necessary  expense  actually  paid  in  carrying  on  the  business.' 
deductible  from  income  derived  from  such  business." 

LEATHER  MFRS'.  NAT.  BANK  v.  TREAT,  COLLECTOR 

(U.  S.  Circuit  Court  of  Appeals,  2nd  Cir.  Jan.  28,  1904) 
(128  Fed.  262) 

Record:  Act  of  June  13,  1898.  Action  to  recover  tax  paid. 
Error  to  IT.  S.  Circuit  Court,  S.  D.,  New  York,  which  rendered  judg- 
ment for  defendant.    116  Fed.  774.    Judgment  affirmed. 

Facts :  The  defendant,  in  assessing  the  plaintiff  the  amount  of 
a  tax  upon  its  capital  included  as  a  part  of  its  capital  the  sum  of 
$77,796  which,  according  to  the  complaint,  was  standing  on  the 
books  of  the  plaintiff  under  the  profit  and  loss  account,  and  ' '  repre- 
sented the  undivided  profits  of  the  plaintiff  as  the  same  existed  at 
the  end  of  preceding  fiscal  year. ' ' 

Question :  Was  the  sum  in  question  taxable  under  the  Act  of 
June  13,  1898  ? 

Decision:  "Wlien  it  appears,  as  it  does  in  the  present  case, 
that  the  undivided  profits  have  been  carried  over  many  dividend 
periods  and  have  been  accumulated  'during  a  period  of  years'  and 
have  in  the  meantime  been  used  in  the  business  like  the  other  assets 
of  the  corporation,  the  inference  is  irresistible  that  they  have  become 
an  accretion  to  the  capital.  When  this  appears,  they  are  taxable, 
just  as  the  accumulated  profits  of  an  individual  are  taxable  when 


545  U.  S.  TAX  CASES  919 

they  have  been  merged  with  his  capital.     This,  we  think,  is  the 
meaning  of  the  statute." 

LEDBETTER  v.  BAILEY,  COLLECTOR 

(U.  S.  District  Court,  W.  D.  N.  C,  July  30,  1921) 
(274  Fed.  375) 

Record :  Volstead  Act  and  R.  S.  Sec.  3224.  In  equity.  Suit 
by  J.  M.  Ledbetter  against  J.  W.  Bailey,  Collector  of  Internal  Rev- 
enue, with  28  other  cases.    Decrees  for  complainant. 

Facts :  The  facts  in  all  of  the  cases  were  similar  to  those  in  the 
Ledbetter  suit.  In  January,  1921,  notice  was  received  by  Led- 
better that  an  assessment  of  taxes  and  penalties  had  been  made 
against  him,  aggregating  $3,083.34,  on  the  ground  that  he  had  oper- 
ated an  illicit  distillery.  This  notice  was  the  first  information  to 
Ledbetter  that  such  claim  for  taxes  against  him  was  in  existence. 
Payment  of  the  taxes  was  demanded.  Complainant  attempted  to 
file  a  claim  for  abatement,  but  the  collector  refused  to  receive  the 
same  unless  it  was  accompanied  by  a  bond,  which  it  appeared  com- 
plainant was  unable  to  furnish.  When  the  collector  was  about  to 
distrain  on  complainant's  property  this  suit  for  an  injunction  was 
instituted. 

Question:  Are  the  so-called  taxes  assessed  under  section  35 
of  the  Volstead  Act  really  taxes  or  are  they  penalties,  and  if  the 
latter,  is  R.  S.  Sec.  3224,  prohibiting  suits  to  restrain  the  collection 
of  a  tax,  applicable  to  this  case  ? 

Decision:  "The  conclusions  of  the  court  are  therefore  that 
under  the  provisions  of  section  35  of  the  Volstead  Act  taxes  cannot 
be  assessed  or  collected ;  that  the  double  tax  provided  for  in  the  act, 
and  the  penalties  prescribed,  are  nothing  more  nor  less  than  punish- 
ment for  the  commission  of  criminal  offenses;  that  these  penalties 
must  be  collected  by  civil  actions,  or  pronounced  as  judgments  in 
criminal  cases ;  that  the  provisions  of  section  3224  do  not  apply,  and 
that  these  suits  are  not  forbidden  thereby ;  that  the  court  has  juris- 
diction to  entertain  the  suits  and  issue  the  orders  of  restraint  or 
decrees  for  injunction  sought  thereby. ' ' 


920  545  U.  S.  TAX  CASES 

LEDERER,  COLLECTOR  v.  CADWALADER 

(U.  S.  Circuit  Court  of  Appeals,  Third  Cir.,  August  18,  1921) 

(274  Fed.  753) 

Record:  Revenue  Act  of  1917.  Suit  to  recover  an  excess 
profits  tax  paid  under  protest.  In  error  to  the  District  Court,  which 
entered  a  judgment  for  plaintiff.  For  case  below  see  273  Fed.  879, 
ante  617.    Affirmed. 

Facts:  John  Cadwalader,  Jr.,  plaintiff  below,  was  appointed 
executor  and  trustee  of  the  estate  of  a  Mr.  Coxe,  who  died  in  1916. 
His  account,  filed  in  1917,  shows  that  he  received  in  commissions  as 
executor  $28,974.  The  Collector  of  Internal  Revenue  imposed  an 
excess  profits  tax  on  these  commissions  under  the  Revenue  Act  of 
1917.  The  testimony  disclosed  that  the  plaintiff  was  a  lawyer  and 
had  no  other  profession.  He  had  nothing  to  do  with  the  preparation 
of  the  will  and  never  represented  the  testator  professionally.  There 
was  no  testimony  tending  to  show  that  he  ever  held  himself  out  as 
a  person  specially  qualified  to  act  or  desirous  of  acting  as  executor, 
and  so  far  as  the  testimony  showed  this  was  the  first  and  only  time 
that  he  ever  acted  as  such. 

Question :  Was  the  defendant,  in  acting  as  executor,  conduct- 
ing a  "trade  or  business"  within  the  meaning  of  the  Revenue  Act 
of  1917  and  so  liable  to  the  excess  profits  tax  under  that  act  upon 
the  commissions  received  from  such  executorship  1 

Decision :  ' '  Taxes  on  income  from  a  'trade  or  business'  clearly 
mean  taxes  on  the  income  from  the  trade,  business,  profession,  or 
occupation  of  the  taxpayer  himself.  This  is  the  plain  meaning  of 
the  statute,  and  any  other  construction  distorts  the  simplicity  of  the 
language  and  requires  that  we  read  into  the  language  something  it 
does  not  contain.  A  single,  isolated  activity  of  tlie  character  of  the 
executorship  of  the  plaintiff  does  not  constitute  a  trade,  business, 
profession,  or  vocation  under  the  facts  of  this  case. "    *    *    *, 

* '  The  question  of  whether  acting  as  executor  of  this  estate  was 
the  business,  occupation,  or  profession  of  the  plaintiff  was  correctly 
submitted  to  the  jury,  whose  verdict  settled  the  fact  in  the  negative, 
and  the  judgment  of  the  District  Court  will  therefore  be  affirmed. ' ' 


545  U.  S.  TAX  CASES  921 

LEVY  V.  WARDELL,  COLLECTOR 

(U.  S.  Supreme  Court,  May  1,  1922) 

(Not  yet  reported) 

Record:  Estate  Tax  Act  of  September  8,  1916.  In  error  to 
the  U.  S.  District  Court,  N.  D.  California,  to  review  a  judgment 
which  dismissed  the  complaint  in  an  action  to  recover  back  a  federal 
estate  tax  as  having  been  unlawfully  collected.  Reversed  and 
remanded  for  further  proceedings. 

Facts :  In  1902,  1903,  and  1907,  the  decedent  transferred  to 
the  plaintiff  certain  securities.  The  transfers  of  the  stock  to  plain- 
tiff were  complete  and  there  were  no  agreements  or  stipulations  by 
which  the  decedent  would  be  entitled  to  a  return  of  the  stock  except 
that  plaintiff  promised  and  agreed  to  pay  to  her  the  dividends 
accruing  thereon  during  her  lifetime,  she,  however,  retaining  no 
testamentary  disposition  or  any  legal  right  whatsoever  over  the 
stock  or  any  part  of  it,  or  any  right  of  revocation.  The  decedent 
died  on  December  15,  1916,  leaving  no  assets  whatever.  However, 
the  Commissioner  assessed,  and  the  defendant  collected,  a  tax  of 
$12,460.84  from  the  plaintiff  on  the  theory  that  the  above  transac- 
tion came  within  the  Revenue  Act  of  1916. 

Questions:  (1)  Was  the  Estate  Tax  Law  of  1916  retroactive, 
so  as  to  apply  to  transfers  made  prior  to  its  passage  1 

(2)  Was  the  trial  court  correct  in  bringing  into  the  case,  on 
plaintiff's  motion,  the  successor  to  the  collector  to  whom  the  tax 
sought  to  be  recovered  had  been  paid  ? 

Decision :  (1)  and  (2)  :  This  case  is  governed  by  the  decisions 
in  Shwab  v.  Doyle  and  Union  Trust  Co.  v.  Wardell. 

LIEBMAN  V.  FONTENOT,  COLLECTOR 
(U.  S.  District  Court,  W.  D.  Louisiana,  July  1,  1921) 
(275  Fed.  688) 
Record:     Revenue  Act  of  1916.     Action  to  recover  federal 
estate  tax  paid  under  protest.    Exception  to  petition  sustained. 

Facts:  Plaintiff,  administratrix  of  the  succession  of  her 
deceased  husband,  by  virtue  of  the  community  property  law  of 
Louisiana,  owned  one-half  of  the  property  acquired  by  the  husband 


922  545  U.  S.  TAX  CASES 

after  the  marriage,  and  was  entitled  to  the  usufruct  of  the  remain- 
ing half,  inherited  by  the  heirs  of  the  husband,  he  not  having  by 
will  deprived  her  of  such  usufruct.  The  total  community  property 
was  $324,218.02,  and  the  plaintiff  in  her  return  to  the  collector  of 
the  half  owned  by  the  estate  of  her  husband,  deducted  therefrom 
the  value  of  the  usufruct  of  such  half,  to  which  usufruct  she  was 
entitled,  basing  its  value  on  her  life  expectancy,  capitalized  at  the 
legal  rate  of  interest,  5%.  Subsequently,  the  collector  figured  the 
tax  on  the  value  of  the  half  interest  as  shown  by  the  inventory, 
$162,109.01,  as  against  the  value  fixed  by  the  administratrix  after 
deducting  the  value  of  the  usufruct,  $105,433.16.  This  action  was 
brought  to  recover  the  additional  tax  collected  from  the  plaintiff  as 
the  result  of  the  increased  valuation. 

Question :  In  computing  the  value  of  the  community  property 
going  to  the  heirs  of  the  deceased  spouse,  should  the  value  of  the 
life  usufruct  in  favor  of  the  wife,  with  which  it  is  encumbered,  be 
first  deducted  before  calculating  the  estate  tax? 

Decision:  ''The  wife's  usufruct  of  the  community  half 
interest  of  the  deceased  husband  is  not  an  absolute  right,  inherent  in 
her.  She  takes  such  usufruct  only  when  the  husband  has  not,  by 
will  or  testament,  disposed  of  his  half  of  the  community.  *  *  *. 
The  federal  inheritance  tax  is  an  excise  tax,  levied  on  the  estate 
transmitted  from  the  living  to  the  dead.  The  estate  so  transmitted, 
in  this  instance,  is  Liebman's  undivided  half  interest  in  the  com- 
munity. The  property  itself  goes  to  his  heirs,  subject,  however,  to 
the  usufruct  of  his  widow.  The  federal  law,  unlike  that  of  the  state, 
makes  no  distinction  in  the  rate  between  certain  heirs.  It  is  a  fixed 
tax  on  the  transmission  of  the  estate  without  regard  to  whom  it 
descends.  It  is  to  be  paid  out  of  the  estate,  and  so  the  court  is  not 
concerned  with  the  proper  division  of  the  tax  as  between  the  heirs 
and  the  widow." 


545  U.  S.  TAX  CASES  923 

LILLEY  BUILDING  AND  LOAN  COMPANY  v.  MILLER, 
COLLECTOR 

(U.  S.  District  Court,  S.  D.  Ohio,  E.  D.,  1922) 
(280  Fed.  143) 

Record:  Revenue  Act  of  1918.  Action  to  recover  corporate 
income  taxes  paid  under  protest.    Petition  dismissed. 

Facts:  The  plaintiff  was  a  corporation  organized  under  the 
laws  of  Ohio,  which  provided  that  "a  corporation  for  the  purpose 
of  raising  money  to  be  loaned  to  its  members  shall  be  known  *  •  ♦ 
as  a  'Building  and  Loan  Association'  or  as  a  'Savings  Association'." 
It  received  deposits  from  non-members  evidenced  by  entries  in 
books  such  as  are  ordinarily  used  by  Savings  Banks.  Withdrawals 
could  be  made  on  presentation  of  books.  On  these  accounts  (which 
constituted  the  bulk  of  its  business)  it  paid  interest  at  a  stated  rate 
of  4%.  It  also  received  time  deposits  for  which  it  issued  certificates 
bearing  interest  at  the  rate  of  5%.  There  were  two  classes  of  stock, 
both  of  which  received  semi-annual  dividends  at  the  rate  of  5%  per 
annum.  In  the  year  1920  the  plaintiff's  stockholders  numbered  301, 
its  borrowers  595,  of  whom  but  two  were  stockholders,  and  its  sav- 
ings depositors  2239.  Its  loans  were  all  made  upon  homes,  the 
average  amount  of  each  being  about  $3500.  The  few  loans  made  to 
members  took  the  same  course  as  those  to  non-members.  The  bor- 
rowing members  gave  their  notes  and  paid  them  off  in  installments, 
such  obligations  being  entirely  disassociated  from  their  obligations 
to  pay  for  stock.  The  ordinary  building  association  method  of  sub- 
scribing for  stock  to  the  amount  of  the  loan,  the  stock  when  paid 
up  extinguishing  the  loan,  was  not  pursued. 

Questions:  (1)  Did  the  definition  of  the  term  "Building 
Association"  contained  in  the  Statutes  of  Ohio  control  the  right  of 
the  plaintiff  to  exemption  from  Federal  income  taxes? 

(2)  What  effect  did  the  making  of  loans  to  non-members  have 
upon  the  plaintiff's  right  to  exemption? 

(3)  Was  the  plaintiff  exempt  from  taxes  under  Section  231  (4) 
of  the  Revenue  Act  of  1918  ? 

Decision:  (1)  "Plaintiff's  interpretation  is  that  corporations 
organized  under  building  association  laws  are  exempt,  although 


924  545  U.  S.  TAX  CASES 

operated  not  for  mutual  purposes  and  with  a  profit  to  a  limited 
number  of  stockholders,  be  they  ever  so  few.  Such  an  interpreta- 
tion would  seem  to  violate  the  intent  of  the  Act.  Recurring  to  the 
matter  of  the  nomenclature  under  the  Ohio  Statutes,  if  we  regard 
the  plaintiff  as  a  "savings  association,"  we  would  have  a  mutual 
bank,  with  capital  stock,  not  organized  and  operated  for  mutual 
purposes,  and  not  without  profit.  The  matter  certainly  can  not  rest 
so  lightly  as  on  the  arbitrary  choice  of  a  name.  The  facts  must 
control. ' ' 

(2)  "It  is  not  thought  that  the  making  of  loans  to  non-mem- 
bers, or  borrowing  from  non-members,  or  receiving  deposits  to  be 
withdrawn  on  demand  or  on  time,  so  long  as  such  transactions  are 
simply  incidental  to  the  primary  business  of  operating  a  mutual 
Building  Association,  would  defeat  the  exemption." 

(3)  "But  here  the  association  has  put  aside  the  attribute  of 
mutuality;  indeed,  it  is  most  difficult  to  distinguish  its  activities 
from  those  of  the  ordinary  savings  bank.  Its  primary  design  no 
longer  is  to  be  an  instrumentality  of  mutual  helpfulness  among  its 
contributors  in  saving  and  borrowing  for  home  owning;  but  its 
object  now  is  the  receiving  of  deposits  from,  and  lending  money  on 
interest  to,  the  public  for  the  profit  of  the  stockholders.  *  *  *  It 
may  not  be  possible  to  define  precisely  how  far  a  building  associa- 
tion may  go  in  extraneous  activities  without  losing  its  essential  char- 
acter; but  it  seems  clear  that,  when  it  ceases  to  be  substantially 
mutual  and  adopts  as  its  chief  business  dealing  for  profit  with  the 
general  public  by  the  methods  of  an  ordinary  savings  bank,  it  is  no 
longer  a  building  association,  entitled  to  be  exempted  from  income 
taxation  under  the  statute  in  question. ' ' 

LIPKE  V.  LEDERER,  COLLECTOR 

(U.  S.  Supreme  Court,  June  5,  1922) 
(Net  yet  reported) 

Record :  Section  3224  R.  S. ;  Section  35  National  Prohibition 
Act.  Action  to  restrain  the  collection  of  certain  alleged  taxes.  Bill 
dismissed,  upon  motion,  for  want  of  equity,  by  U.  S.  District  Court. 
274  Fed.  493.    Decree  reversed  and  cause  remanded. 


545  U.  S.  TAX  CASES  925 

Facts:  On  December  29,  1920,  the  complainant  was  arrested 
for  selling  liquor  contrary  to  the  National  Prohibition  Act  and  gave 
bail  to  appear  and  answer  in  the  United  States  District  Court.  This 
prosecution  is  still  pending.  On  March  18,  1921,  complainant 
received  from  the  defendant  collector  a  "notice  and  demand  for 
tax";  and  on  March  31, 1921,  a  second  notice.  By  the  latter  he  was 
informed  that,  if  he  did  not  pay  the  alleged  tax  within  ten  days, 
collection  would  be  made  by  seizure  and  sale  of  his  property.  The 
amount  demanded  is  $557.29  made  up  of  three  items :  one  for  $45.83 
for  double  tax  under  Section  35 ;  another  of  $11.46  called  penalty 
under  Section  3244  of  the  Revised  Statutes,  and  a  further  amount 
of  $500  ''special  penalty"  under  section  35.  This  action  was  com- 
menced on  May  25,  1921,  to  enjoin  the  defendant  collector  from 
proceeding  to  collect  the  above  amount  by  distraint. 

Question:  (1)  Is  this  case  properly  before  the  Supreme 
Court  by  direct  appeal  from  the  District  Court? 

(2)  Are  the  amounts  which  the  defendant  seeks  to  collect  in 
fact  "taxes"? 

(3)  How  is  the  imposition  directed  by  Section  35,  National 
Prohibition  Act,  to  be  enforced  ? 

(4)  Is  Section  3224,  R.  S.  applicable  to  this  case? 

Decision:  (1)  "The  cause  is  properly  here  by  direct  appeal 
from  the  District  Court.  Appellant  claims  that,  as  construed  and 
sought  to  be  enforced  by  the  Collector,  Section  35  of  the  Prohibi- 
tion Act  conflicts  with  the  Federal  Constitution.  The  point  is  sub- 
stantial and  sufficient  to  support  our  jurisdiction, ' ' 

(2)  "The  mere  use  of  the  word  'tax'  in  an  act  primarily 
designed  to  define  and  suppress  crime  is  not  enough  to  show  that, 
within  the  true  intendment  of  the  term,  a  tax  was  laid.  Bailey  v. 
Drexel  Furniture  Co.  (May  15,  ]922).  When  by  its  very  nature  the 
imposition  is  a  penalty,  it  must  be  so  regarded.  Helwig  v.  United 
States,  188  U.  S.  605,  613,  Evidence  of  crime  (Section  29)  is  essen- 
tial to  assessment  under  Section  35.  It  lacks  all  the  ordinary  char- 
acteristics of  a  tax,  whose  primary  function  "is  to  provide  for  the 
support  of  the  Government, ' '  and  clearly  involves  the  idea  of  pun- 


926  545  U.  S.  TAX  CASES 

ishment  for  infraction  of  the  law, — the  definite  function   of  a 
penalty. ' ' 

(3)  "Section  35  prescribes  no  definite  mode  for  enforcing  the 
imposition  which  it  directs,  and  if  it  be  interpreted  as  above 
stated,  we  do  not  understand  counsel  for  the  United  States  claim 
that  relief  should  be  denied  to  the  appellant.  Before  collection  of 
taxes  levied  by  statutes  enacted  in  plain  pursuance  of  the  taxing 
power  can  be  enforced,  the  taxpayer  must  be  given  fair  opportunity 
for  hearing, — this  is  essential  to  due  process  of  law,  Central  of 
Georgia  R.  Co.  v.  Wright,  207  U.  S.  127,  136,  138,  142,— and  cer- 
tainly we  cannot  conclude,  in  the  absence  of  language  admitting  of 
no  other  construction,  that  Congress  intended  that  penalties  for 
crime  should  be  enforced  through  the  secret  findings  and  summary 
action  of  executive  officers.  The  guarantees  of  due  process  of  law 
and  trial  by  jury  are  not  to  be  forgotten  or  disregarded. ' ' 

(4)  "The  collector  demanded  payment  of  a  penalty,  and  Sec- 
tion 3224,  which  prohibits  suits  to  restrain  assessment  or  collection 
of  any  tax,  is  without  application.  And  the  same  is  true  as  to 
statutes  granting  the  right  to  sue  for  taxes  paid  under  protest. ' ' 

Dissenting  Opinion:  Mr.  Justice  Brandeis  and  Mr.  Justice 
Pitney  dissented  from  the  above  majority  opinion  and  contended 
that,  inasmuch,  so  far  as  it  appears,  the  plaintiff  had  a  full,  ade- 
quate and  complete  remedy  at  law,  and  there  was  no  danger  of 
irreparable  injury,  the  relief  should  be  denied,  whatever  the  con- 
struction of  Section  35,  National  Prohibition  Act,  and  even  if  it  be 
deemed  unconstitutional. 

LONG  V.  WATTS 
(Supreme  Court  of  N.  C,  March  8,  1922) 
(110  S.  E.  765) 
Record:    North  Carolina  Income  Tax  Act,  Pub.  Laws  1921, 
C.  34.     Civil  action  to  enjoin  the  State  Commissioner  from  col- 
lecting a  tax.     From  a  judgment  granting  the  injunction,  defend- 
ant appeals.     Affirmed. 

Facts:  The  plaintiff  in  this  action  was  and  had  been  for  a 
number  of  years  a  state  judge.  This  action  was  instituted  to  pre- 
vent the  defendant  from  levying  a  tax  on  his  official  salary. 


545  U.  S.  TAX  CASES  927 

Questions:  (1)  Does  the  Constitutional  provision  that  "sal- 
aries of  the  judges  shall  not  be  diminished  during  their  continu- 
ance in  office ' '  prevent  the  imposition  of  a  tax  upon  the  official  sal- 
ary of  a  state  judge  ? 

(2)  If  the  answer  to  the  above  question  is  Yes,  may  not  an 
income  tax  be  levied  upon  the  judge's  official  salary  when  such 
salary  has  been  increased  by  the  same  assembly  which  passed  the 
act  imposing  the  income  tax,  at  least  to  the  extent  of  the  increase  ? 

Decision:  (1)  "A  tax  which  indirectly  takes  from  the  plain- 
tiff a  part  of  that  which,  by  law,  he  is  entitled  to  receive  for  his 
services  is  clearly  within  the  prohibition  against  diminution. '  *  The 
court,  therefore,  concluded  on  this  point  that  the  official  salary  of 
the  plaintiff  was  not  subject  to  tax.  "Let  it  be  understood  that 
this  is  the  law  as  it  is  now  written,  and  it  can  make  no  difference 
whether  the  tax  be  levied  before  or  after  the  taking  of  office. ' ' 

(2)  "But  it  is  urged  that  the  Legislature  of  1921  increased 
the  plaintiff's  salary  and  therefore  the  same  or  any  subsequent 
Legislature  may  levy  a  tax  against  it  without  incurring  the  charge 
of  having  diminished  it  during  his  continuance  in  office.  This  argu- 
ment is  based  on  the  contention  that  by  adding  an  additional  sum, 
the  Legislature  may  then  tax  the  whole  so  long  as  the  tax  does  not 
exceed  the  increase.  *  *  *  The  Constitution  is  not  to  be  so 
easily  discarded.  The  moment  the  increase  took  effect  it  became 
as  much  a  part  of  the  plaintiff 's  salary  as  the  original  amount,  and 
the  whole  was  then  protested  by  the  Constitutional  provision 
against  diminution. ' ' 

IN  RE  LYON'S  ESTATE 

(Court  of  Appeals  of  N.  Y.,  April  18,  1922) 

(135  N.  E.  247) 

Record:     Transfer  Tax  Law  (Tax  Law,  section  220,  subd.  7). 

An  order  of  the  Surrogate  fixing  a  transfer  tax  was  reversed  by 

the  Appellate  Division  (199  App.  Div.  912,  190  N.  Y.  Supp.  938). 

The  party  opposing  the  tax  appeals.     Reversed. 

Facts:  On  July  31,  1908,  a  house  and  lot  was  conveyed  to 
Edmund  Lyon  and  to  Carolyn,  his  wife,  as  tenants  by  the  entirety. 
In  1916  the  New  York  Legislature  amended  its  transfer  tax  statute 


928  545  U.  S.  TAX  CASES 

to  provide  that,  where  there  is  a  joint  tenancy  or  a  tenancy  by  the 
entirety,  the  right  of  the  survivor  to  the  immediate  ownership  and 
enjoyment  of  the  property  shall  be  deemed  a  taxable  transfer  in  the 
same  manner  as  though  the  whole  property  belonged  absolutely  to 
the  deceased  tenant  and  had  been  bequeathed  to  the  survivor  by  the 
deceased. 

Question:  Could  the  Legislature  constitutionally  place  a 
transfer  tax  upon  the  surviving  tenant  by  the  entirety  in  the  same 
manner  as  though  the  whole  property  belonged  to  the  deceased 
tenant  in  a  case  where,  although  the  deceased  tenant  died  after  the 
passage  of  the  taxing  act,  the  estate  by  the  entirety  was  created  be- 
fore the  passage  of  the  act  ? 

Decision:  "Whatever  power  the  Legislature  may  have  with 
regard  to  such  estates  later  created  does  not  extend  to  those  already 
vested  before  the  adoption  of  the  amendment.  *  •  •  This  es- 
tate by  the  entirety  with  all  its  incidents  was  vested  in  Mr.  and 
Mrs.  Lyons  in  1910.  What  was  then  acquired  may  not  subse- 
quently be  diminished  by  a  tax  upon  that  acquisition.  As  there  was 
no  transfer  after  1916,  there  can  be  no  tax." 

MALLEY,  FORMERLY  COLLECTOR  v.  HOWARD,  et  al., 

TRUSTEES 

CASEY,  ACTING  COLLECTOR  v.  HOWARD,  et  al., 

TRUSTEES 

MALLEY,  FORMERLY  COLLECTOR  v.  CROCKER,  et  al., 

TRUSTEES 
MALLEY,  FORMERLY  COLLECTOR  v.  HECHT,  JR.,  et  al., 

TRUSTEES 
(Circuit  Court  of  Appeals,  1st  Cir.,  June  6,  1922) 
(281  Fed.  363) 
Record:     Revenue  Acts  of  1916  and  1918.    Error  to  the  Dis- 
trict Court;  reversed.    Now  pending  in  Supreme  Court  on  writ  of 
certiorari  granted  Oct.  23,  1922. 

Facts:  These  cases  involved  the  validity  of  taxes  imposed 
upon  business  organizations,  commonly  known  as  Massachusetts 
Trusts,  under  the  Revenue  Acts  of  1916  and  1918.  The  chief  busi- 
ness of  the  Haymarket  and  Hecht  Trusts  was  that  of  owning,  man- 


545  U.  S.  TAX  CASES  929 

aging  and  leasing  real  estate,  and  distributing  the  net  income  to  its 
shareholders.  The  Crocker  Trust  was  a  large  manufacturing  con- 
cern. Additional  facts  relative  to  these  trusts  are  given  below  in 
the  Decision. 

The  Act  of  1916  levied  a  tax  on  associations  "now  or  hereafter 
organized  in  the  United  States  for  profit  and  having  a  capital  stock 
represented  by  shares  *  •  *  with  respect  to  the  carrying  on  or 
doing  business  by  such  •  •  *  association  •  •  *  equivalent  to 
50  cents  for  each  $1,000  of  capital  stock  and  in  estimating  the  value 
of  capital  stock  the  surplus  and  undivided  profits  shall  be  included 
*  *  *.  The  amount  of  such  annual  tax  shall  in  all  cases  be  com- 
puted on  the  basis  of  the  fair  average  value  of  the  capital  stock  for 
the  preceding  year. ' ' 

The  Act  of  1918,  section  1,  includes  associations  under  the  term 
"corporation",  and  in  section  1000a  provides  for  an  annual  "spe- 
cial excise  tax  with  respect  to  carrying  on  or  doing  business  equiv- 
alent to  $1  for  each  $1,000  of  so  much  of  the  fair  average  value  of 
its  capital  stock  for  the  preceding  year, ' '  etc.  ' '  In  estimating  the 
value  of  capital  stock  the  surplus  and  undivided  profits  shall  be 
included. ' ' 

Question :  Are  the  plaintiffs  associations  having  a  capital  stock 
represented  by  shares,  within  the  meaning  of  the  above  provisions  ? 
(The  Haymarket  and  Hecht  Trusts  deny  they  are  associations  with- 
in the  meaning  of  the  statutes.  The  Crocker  Trust  admits  that  it  is 
an  association  but  claims  immunity  from  tax  on  the  ground  that  it 
has  no  capital  stock  within  the  meaning  of  the  statutes.) 

Decision :  In  Eliot  v.  Freeman,  220  U.  S.  178,  ante  198,  the 
court  held  the  Act  of  1909  not  to  cover  two  typical  Massachusetts 
real  estate  trusts,  on  the  ground  that,  "The  language  of  the  act, 
'now  or  hereafter  organized  under  the  laws  of  the  United  States,' 
etc.,  imported  an  organization  deriving  power  from  statutory  enact- 
ment." The  present  Acts  cannot  be  given  the  same  interpretation 
because  Congress  has  changed  the  wording  from  '^organized  under 
the  laws  of  the  United  States  or  of  any  state/*  to  "organized  in  the 
United  States."  It  is  elementary  that  when  language  used  in  an 
earlier  statute  has  in  application  received  judicial  construction. 


930  545  U.  S.  TAX  CASES 

change  in  language  in  later  analogous  legislation  imports  legislative 
purpose  to  attain  a  different  result. 

In  1899,  members  of  the  Heeht  family  holding  as  tenants  in 
common  real  estate  in  Boston  conveyed  it  to  Jacob  Hecht,  who  de- 
clared a  trust  for  twelve  beneficiaries,  who  received  certificates 
transferable  like  ordinary  corporation  shares,  but  with  certain  re- 
strictions. While  the  Hecht  trustee  had  broad  general  powers  of 
management,  including  power  to  buy  and  sell,  the  seat  of  real  power 
was  with  the  shareholders  and  not  with  the  trustee;  for  three- 
fourths  of  the  shareholders  might  remove  the  trustee,  three-fifths 
might  terminate  the  trust  or  give  him  binding  instructions,  and 
also,  what  is  of  vital  importance, — modify  the  instrument  in  any 
particular.  The  Hecht  organization  is  not  a  trust  within  the  doc- 
trine of  the  Massachusetts  decisions.  Williams  v.  Milton,  215  Mass. 
1.  Compare  Crocker  v.  Malley,  249  U.  S.  223,  and  in  re  Association 
Trust,  222  Fed.  1012.  The  stockholders  of  the  Hecht  Trust  have 
treated  their  dividends  like  corporation  dividends  in  their  income 
tax  return.  Plainly  the  Hecht  Trust  is  quasi-corporate  in  form  and 
power.    It  is  an  association  within  the  meaning  of  the  Revenue  Acts. 

"The  Haymarket  Trust,  both  in  genesis  and  organization,  is 
even  more  like  a  corporation.  *  *  *  The  declaration  of  trust 
provides  for  nearly  all  the  machinery  and  proceedings  of  an  ordi- 
nary corporation.  We  hold  it  to  also  be  quasi-corporate  and  an 
association  within  the  meaning  of  the  Revenue  Acts." 

The  Crocker  Trust  was  admitted  to  be  an  association  but 
exemption  was  claimed  on  the  ground  that  the  concern  had  no  capi- 
tal stock.  It  had  issued  96,000  shares  of  no  par  value  transferable 
like  corporation  stock.  It  sought  exemption  on  the  ground  that  it 
had  attached  no  par  value  to  its  96,000  shares.  * '  We  cannot  adopt 
this  scholastic  and  artificial  distinction  *  *  *.  It  is  for  present 
purposes  immaterial  whether  the  stock  of  a  corporation,  of  an  asso- 
ciation, or  a  joint-stock  company  has  or  has  not  par  value.  •  •  • 
Congress  intended  that  this  tax  should  be  measured  by  the  average 
amount  of  capital  used  during  the  tax  year  in  doing  the  business. 
The  phrase  in  the  statutes  as  to  'including  surplus  and  undivided 
profits'  puts  beyond  doubt  the  question  of  the  Congressional  intent 
to  measure  this  tax  by  business  and  financial  realities,  not  by  book- 


545  U.  S.  TAX  CASES  931 

keeping  forms  or  mere  names.  *  *  •  The  Crocker  Association 
cannot  escape  taxation,  falling  on  its  competitors,  by  adopting  the 
modem  theory  of  no  par  value  for  its  stock. ' ' 

Massachusetts  statutes  have  described  such  organizations  as 
associations,  and  have  put  their  liability  to  ordinary  creditors 
apparently  on  the  same  basis  as  corporations.  The  court,  therefore, 
had  no  hesitation  in  reaching  the  conclusion  that  they  have  now 
been  given  a  statutory  basis  as  quasi-corporate,  and  that  they  are 
associations  within  the  meaning  of  the  Federal  Statutes,  as  well  as 
under  the  Massachusetts  Statutes. 

"The  conclusion  now  reached  accords  with  the  reasoning  and 
decision  of  this  court  in  Malley  v.  Bowditch,  259  Fed.  809."  See 
ante  327. 

MALLEY,  COLLECTOR  v.  WALTER  BAKER  &  CO. 

(U.  S.  Circuit  Court  of  Appeals,  First  Cir.,  Oct.  Term,  1921) 
(281  Fed.  41) 

Record :  Revenue  Act  of  1918.  Suit  to  recover  tax  paid  under 
protest.  In  error  to  the  District  Court,  where  a  verdict  was  ordered 
for  the  plaintiff  for  the  full  amount  claimed.  Reversed  and 
remanded. 

Facts :  The  plaintiff,  a  manufacturer  of  sweet  chocolate,  made 
sales  of  such  chocolate  between  February  24  and  August  31,  1919, 
aggregating  $635,137.50,  and  paid  under  protest  the  5  per  cent  tax 
thereon  under  the  provisions  of  Title  9,  section  900  of  Act  of  1918, 
which  imposes  an  excise  tax  on  candy.  The  court  below  held  that 
chocolate  was  an  independent  substance  used  directly  for  food  and, 
though  used  in  the  manufacture  of  candy,  was  not  candy  within 
the  meaning  of  the  Act.  The  court  directed  a  verdict  for  the  plain- 
tiff without  submitting  the  question  of  fact  of  whether  sweet  choco- 
late was  candy  to  the  jury.  The  Commissioner  had  ruled  that 
"sweet  chocolate  sold  in  parcels  of  such  size  and  shape  that  it  is 
commonly  purchased  and  considered  as  candy  by  the  general  public 
is  taxable  as  candy,  but  sweet  chocolate  sold  in  large  purchases  not 
as  candy  but  intended  for  further  manufacturing  purposes  is  not 
taxable  as  candy."     •     •     • 


932  545  U.  S.  TAX  CASES 

Question :  Was  the  Commissiorier  justified  in  making  the  tax- 
ability of  sweet  chocolate  as  "candy"  depend  upon  the  form  in 
which  it  is  sold  and  the  use  to  which  it  is  to  be  put  ? 

Decision :  The  court  overruled  the  decision  of  the  lower  court 
holding  that  sweet  chocolate  is  food  and  hence  that  all  of  it  is 
exempt  from  the  tax,  and  approved  the  construction  adopted  by 
the  Commissioner.  "But  this  sweet  chocolate  product  consists,  as 
already  noted,  more  than  half  of  sugar.  Sugar  is  far  more  impor- 
tant as  a  food  element  than  is  chocolate.  Sugar  is  admittedly  the 
basic  ingredient  of  candy.  To  hold,  as  the  court  below  held,  that 
sweet  chocolate  is  not  candy  because  chocolate  is  also  food,  falls  logi- 
cally little  short  of  holding  that  candy  is  not  candy  because  sugar  is 
also  food.  *  •  •  We  cannot  agree  with  the  court  below  that  sweet 
chocolate  is  not  candy  simply  because  made  up  of  about  half  and 
half  of  chocolate  and  sugar, — each  of  which  is  a  food.  Some  other 
test  must  be  found.  ♦  •  *  The  distinction  turns  not  so  much 
on  the  composition  of  the  article  as  on  the  way  or  form  in  which  it 
is  sold  and  upon  the  use  made  of  it  by  its  purchasers. ' ' 

' '  The  plaintiff  is  not  entitled  to  recover  more  than  the  amount 
that  it  can  show  it  paid  as  a  tax  on  such  portions  of  the  product  in 
question  as  were  not  sold  and  used  as  candy  within  the  meaning 
of  the  Department 's  regulation. ' ' 

MARTIN  V.  EDWARDS,  COLLECTOR 

(U.  S.  District  Court,  S.  D.  New  York,  March  10,  1922) 
(Not  yet  reported) 

Record :  Revenue  Act  of  1917.  Action  to  recover  excess  profits 
tax  paid  under  protest.    Judgment  for  defendant. 

Facts:  The  plaintiff  corporation  acted  as  sole  agent  for  the 
Martin  Bennett  Asbestos  Mines,  pursuant  to  a  contract  entered 
into  between  the  Martin  Bennett  Asbestos  Mines  and  Robert  H. 
Martin  in  1913.  Under  this  contract,  the  plaintiff  was  obliged  to 
make  settlement  for  domestic  shipments  by  sending  its  check,  less 
commissions  and  interest,  as  soon  as  the  invoices  could  be  properly 
checked  up.  Plaintiff's  balance  sheet  as  of  December  31,  1916,  indi- 
cated that  out  of  its  assets  of  $97,842.10,  $76,606.47  represented 


545  U.  S.  TAX  CASES  933 

accounts  and  bills  receivable  derived  from  sales  for  the  account  of 
the  mine  and  sales  on  its  own  accounts  and  $13,872.50  represented 
loans  as  direct  advances  to  the  mines  before  the  maturity  of  the 
bills  of  customers  of  the  latter  to  whom  plaintiff  had  sold  products 
of  the  mines.  The  balance  sheet  of  December  31,  1917,  indicated 
that  approximately  only  $16,000  of  the  capital  and  surplus  which 
aggregated  $78,330  was  available  in  the  form  of  cash  in  bank. 
During  the  year  1915  plaintiff  purchased  on  his  own  account  mer- 
chandise to  the  amount  of  $94,021.72,  and  sold  such  merchandise 
for  $98,626.31.  In  1916,  such  purchases  on  its  own  account 
amounted  to  $47,011.16,  and  sales  on  its  account  amounted  to 
$49,225.66.  In  1917  such  purchases  on  its  own  account  amounted 
to  $27,156.55,  and  sales  amounted  to  $49,289.89, 

Question :  Was  the  plaintiff  entitled  to  assessment  under  Sec- 
tion 209  of  the  Revenue  Act  of  1917  as  being  engaged  in  "a  trade 
or  business  having  no  invested  capital  or  not  more  than  a  nominal 
capital  ? ' ' 

Decision:  "If  it  had  limited  itself  to  buying  and  selling  on 
commission,  with  a  small  incidental  trading  on  its  own  account,  the 
plaintiff's  contention  would  be  good,  but  in  the  case  of  this  corpo- 
ration it  is  evident  that  there  was  substantial  trading  on  its  own 
account,  and  also  that  it  required  capital  to  conduct  its  business  in 
the  way  it  was  conducted.  *  *  *  It  is  urged  that  during  the 
'^ear  1917,  outside  of  the  months  of  January  and  February,  when 
«fhe  remittances  exceeded  the  receipts  by  $6,088,  plaintiff  was  able 
to  conduct  its  business  without  resorting  to  its  capital.  This  argu- 
ment is  based  on  the  fact  that  except  during  those  two  months  it 
seems  to  have  received  more  than  it  paid  out.  Its  capital  was, 
however,  during  this  very  period  engaged  in  its  business  and  being 
turned  over  in  connection  with  sales  of  asbestos.  Its  advances  in- 
cluded capital  available  or  capital  repaid  from  advances.  If  this 
is  not  so,  I  can  not  see  where  its  capital  was,  or  what  use  was  being 
made  of  it.  *  *  "  *  Here  it  may  be  that  there  were  sufficient 
bills  and  accounts  receivable  derived  from  sale  of  products  of  the 
mines  to  offset  all  loans  and  advances  to  the  latter,  but  they  have 
not  been  collected  and  the  capital  of  the  plaintiff  was  needed, 
though  temporarily,  to  make  good  the  advances  which  were  con- 


934  545  U.  S.  TAX  CASES 

stantly  made  before  the  60  days  credits  to  customers  of  the  mines 
had  expired  and  the  moneys  came  in.  Every  successful  business 
would  have  its  capital  not  only  unimpaired  but  unemployed  if  its 
outstanding  accounts  receivable  could  be  at  aU  times  liquidated 
forthwith,  but  the  chief  use  of  capital  is  to  carry  it  along  until  the 
payments  come  in.  I  am  of  the  opinion  that  the  plaintiff  had  more 
than  a  nominal  capital  and  had  a  substantial  invested  capital  which 
was  employed  in  making  advances  to  or  on  account  of  the  mines,  and 
also  in  buying  merchandise  on  its  own  account  for  profitable  sale. ' ' 

MASSEY  V.  LEDERER,  COLLECTOR 

(U.  S.  District  Court,  E.  D.  Penn.,  Dec.  30,  1921) 
(277  Fed.  123) 

Record:  Revenue  Acts  of  1916  and  1917.  Suit  to  recover 
amount  of  additional  income  tax  paid  under  protest  by  plaintiff. 
Judgment  entered  for  defendant. 

Facts:  In  February,  1918,  the  plaintiff  filed  with  defendant 
his  return  for  the  year  1917.  Of  his  gross  income,  the  sum  of 
$8,880  was  received  as  interest  on  bonds  containing  covenants  to 
pay  to  the  bondholder  interest  without  deduction  of  taxes  imposed 
under  any  law  of  the  United  States.  The  normal  tax  of  2%  upon 
the  income  thus  derived,  amounting  to  $117.60,  paid  by  the  cor- 
porations issuing  the  bonds,  was  not  included  by  plaintiff  in  his 
gross  income.  Subsequently  the  Commissioner  levied  an  additional 
assessment  against  plaintiff,  the  basis  of  which  was  the  addition 
to  his  income  of  said  sum  of  $177.60. 

Question :  Are  taxes  upon  interest  accruing  upon  bonds  con- 
taining tax-free  covenants  withheld  and  paid  by  the  corporate 
obligors  taxable  income  of  the  obligee  ? 

Decision:  "The  tax-free  covenant  in  the  bonds  is  equivalent 
to  an  agreement  of  the  obligors  to  pay  the  owners  the  agreed 
rate  of  interest  plus  the  taxes  and  it  is  immaterial  whether  the 
taxes  are  paid  by  the  owners  of  the  bonds  to  the  Government  and 
the  amount  thereof  paid  by  the  obligors  to  the  owners  or  whether 
under  the  covenant  and  the  statute  the  taxes  are  paid  direct  to  the 
Government  by  the  obligors. 


545  U.  S.  TAX  CASES  935 

"The  taxes  paid  for  the  plaintiff  by  the  corporation  come 
within  the  definition  of  income  as  '  gains,  profit,  and  income  derived 
from  any  source  whatever'  in  the  Act  of  1917," 

The  provision  of  the  Revenue  Act  of  1917  that  a  corporation 
cannot  deduct  from  its  gross  income  the  amount  withheld  by  it  as 
the  normal  tax  on  its  bonds  containing  tax-free  covenants  does  not 
show  that  the  tax  so  paid  was  the  tax  of  the  corporation,  and  not 
of  the  bondholders,  since  Congress  also  refused  to  allow  such  cor- 
porations to  deduct  all  interest  paid  by  them. 

The  conclusion  is  that  the  plaintiff  is  not  entitled  to  recover, 
and  judgment  will  be.  entered  for  the  defendant 

MAYES,  COLLECTOR  v.  UNITED  STATES  TRUST  CO. 

(U.  S.  Circuit  Court  of  Appeals,  Sixth  Circuit,  April  4,  1922) 

(280  Fed.  25) 

Record:  Act  of  October  22,  1914,  Action  to  recover  taxes 
paid  under  protest.  In  error  to  U.  S.  District  Court,  "Western  Dis- 
trict of  Kentucky,  ^hich  rendered  judgment  for  plaintiff.  Judg- 
ment affirmed. 

Facts :  Plaintiff  was  incorporated  in  the  year  1902  under  the 
laws  of  Kentucky  with  authority,  not  only  to  carry  on  a  "general 
trust  and  finance  business"  but  also  (among  other  things)  to  re- 
ceive money  on  deposit  and  pay  interest  thereon,  and  to  loan  money 
on  such  securities  as  it  may  approve.  The  trust  company  not  only 
carried  on  a  general  trust  business,  but  received  deposits  subject 
to  check,  as  well  as  on  certificates,  and  made  loans  secured  by  col- 
lateral or  mortgage.  For  the  fiscal  year  1915  plaintiff  was  assessed 
$312,  being  two-thirds  of  what  would  be  the  annual  tax  upon  its 
entire  capital,  surplus,  and  undivided  profits,  inasmuch  as  only 
two-thirds  of  a  fiscal  year  remained  after  November  1,  1914,  when 
the  liability  to  tax  accrued.  For  the  first  half  of  the  fiscal  year 
1916  it  was  assessed  $230.50,  being  one-half  of  the  annual  tax 
Judgment  was  rendered  in  favor  of  the  plaintiff  for  one-half  the 
amount  sued  for.    The  defendant  alone  sought  review. 

Questions:  (1)  Was  the  plaintiff  liable  to  the  annual  tax 
imposed  by  the  Act  of  October  22,  1914,  of  $1  for  each  $1,000  of 
capital  used  or  employed,  including  surplus  and  undivided  profits  ? 


936  545  U.  S.  TAX  CASES 

(2)  If  so,  how  should  the  capital  employed  in  the  banking 
business  be  measured  t 

(3)  Did  the  evidence  support  the  finding  of  the  trial  court 
that  one-half  of  plaintiff's  capital  was  employed  in  the  banking 
business  ? 

Decision:  (1)  "It  clearly  appears  from  what  has  already 
been  said  that  plaintiff  was  engaged  in  banking,  and  so  was  sub- 
ject to  the  t£ix  upon  its  capital  employed  in  that  business.  ("We 
shall  use  the  term  'capital'  as  including  surplus  and  undivided 
profits.)  That  plaintiff  had  some  amount  of  capital  employed  in 
banking  is  equally  clear.  The  fact,  as  asserted  by  plaintiff,  that 
an  amount  equal  to  its  capital,  surplus,  and  undivided  profits  was 
permanently  invested  in  its  office  building  and  in  public  securities 
has  no  tendency  to  show  that  its  capital  was  wholly  withdrawn 
from  the  banking  business.  These  permanent  investments  equally 
secure  plaintiff's  creditors  in  the  trust  business  and  the  banking 
business.  Plaintiff  was  thus  liable  to  taxation  on  the  amount  of 
capital  employed  in  the  banking  business. ' ' 

(2)  "•  •  •  At  least  in  the  absence  of  proof  of  a  more  sat- 
isfactory method,  the  capital  so  employed  was  properly  measured 
by  the  ratio  which  the  assets  employed  in  the  banking  business  bore 
to  the  assets  employed  in  the  aggregate  business.  •  •  •  The 
diflficulty  lies  in  apportioning  the  assets  between  the  trust  and  the 
banking  businesses.  The  assessment  was  presumptive  evidence  of  its 
correctness.  It  was  open  to  the  plaintiff,  however,  to  show  the  con- 
trary; but  the  burden  rested  upon  it  to  do  so,  and  if  it  failed,  it 
was  not  entitled  to  recover. ' ' 

(3)  "Upon  this  record,  it  is  obvious  that  less  than  plaintiff's 
entire  capital  was  employed  in  banking.  •  •  •  But  plaintiff's 
president  (who  was  the  only  witness  in  the  case),  replying  to  a 
request  to  give  (based  on  the  figures  he  had  submitted)  the  amount 
of  the  trust  business  during  the  two  fiscal  years  as  compared  with 
the  amount  of  the  banking  business,  stated  that  the  trust  business 
was  about  six-sevenths  and  the  banking  end  one-seventh.  This  esti- 
mate was  apparently  based  largely,  if  not  entirely,  upon  the  moneys 
employed  in  the  respective  branches  of  the  business;  but,  in  the 


545  U.  S.  TAX  CASES  937 

absence  of  a  better  method  of  determining  the  ratio  of  capital  em- 
ployed in  each  business,  we  are  unable  to  say  that  the  testimony 
had  no  substantial  tendency  in  that  direction,  having  in  mind  the 
knowledge  presumably  possessed  by  the  president  of  the  relative 
earnings  in  the  two  departments  and  of  their  relative  importance, 
and  having  in  mind  that  apportionment  of  overhead  expenses  (such 
as  rental  use,  upkeep,  supervision,  and  perhaps  to  some  extent  clerk 
hire)  would  be  largely  a  matter  of  estimate,  and  perhaps  in  some 
respects  more  or  less  arbitrary,  unless  on  the  basis  of  business 
transactions.  We  therefore  think  the  evidence  would  fairly  en- 
able an  inference  to  be  drawn,  within  reasonable  limitations,  of 
the  amount  of  capital  employed  in  banking.  If  it  would  support 
an  inference  by  the  jury,  it  would  equally  support  an  inference 
by  the  judge  upon  a  submission  such  as  was  made  here.  The  trial 
judge,  for  some  reason  which  is  not  apparent,  determined  that 
one-half  plaintiff's  capital  was  employed  in  the  banking  business. 
We  need  not  determine  whether  that  conclusion  would  be  sustain- 
able against  complaint  by  plaintiff.  It  seems  enough  to  say  that, 
in  our  opinion,  there  was  substantial  evidence  tending  to  support 
the  conclusion  that  not  more  than  one-half  of  plaintiff's  capital  was 
employed  in  banking,  and  thus  that  defendant  is  not  prejudiced 
by  the  finding. ' ' 

McNALLY  V.  FIELD 

(U.  S.  Circuit  Court,  D.  Khode  Island,  Dec.  20,  1902) 
(119  Fed.  445) 

Record :  Act  of  June  13,  1898.  Act  of  March  2,  1901.  Peti- 
tion for  a  writ  of  mandamus.  Demurrer  overruled  and  petition 
granted. 

Facts :  The  Act  of  June  13,  1898,  provided  for  a  stamp  tax 
on  surety  bonds  ' '  except  such  as  may  be  required  in  legal  proceed- 
ings. ' '  These  words  were  eliminated  in  the  Act  of  March  2,  1901, 
which  amended  the  prior  act.  Under  the  prior  act,  the  Commis- 
sioner ruled  that  bonds  of  administrators  were  exempt,  but  it  was 
ruled  that  the  amendatory  act,  by  eliminating  the  words  quoted 
made  such  bonds  taxable. 


938  545  U.  S.  TAX  CASES 

Questions :  (1)  Were  administrator's  bonds  taxable  under  the 
Act  of  March  2,  1901? 

(2)  What  weight  is  to  be  given  to  the  decision  of  the  Commis- 
sioner of  Internal  Revenue? 

Decision:  (1)  "The  Act  of  March  2,  1901,  was  amendatory 
to  this  act  [of  June  13,  1908],  and  its  purpose,  as  the  title  shows, 
was  to  'reduce  taxation'  under  the  original  act.  •  •  •  It  is 
manifest  that  Congress  did  not  intend  to  enlarge  the  scope  of  the 
original  act.  In  that  act  Congress  evidently  desired  to  tax  all 
classes  of  bonds,  but,  on  grounds  of  public  policy  or  because  such 
taxation  might  prove  unconstitutional,  it  excluded  bonds  required 
in  legal  proceedings.  Under  such  circumstances,  it  is  not  reason- 
able to  conclude  that  it  was  the  purpose  of  Congress,  in  an  act  to 
reduce  taxation,  to  change  the  policy  which  it  has  followed  since 
the  adoption  of  the  war  revenue  act  of  1862  (12  Stat.  481),  and 
to  declare  its  purpose  to  tax  this  class  of  bonds.  •  *  •  Such  a 
conclusion  should  rest  on  a  stronger  foundation  than  an  interpre- 
tation of  an  ambiguous  statute  which  leads  to  such  a  result." 

(2)  "It  is  true  that  the  decision  of  the  Commissioner  of  In- 
ternal Revenue  or  of  any  department  of  the  Government,  in  con- 
struing a  statute,  is  entitled  to  due  consideration  and  much  respect, 
but,  giving  the  rulings  of  the  Commissioner  such  weight  as  they  are 
entitled  to  upon  the  facts  as  they  appear,  they  cannot  be  permitted 
to  govern  when  the  proposed  construction  of  the  statute  is  open  to 
the  serious  objections  arising  in  the  case  at  bar." 

MEISCHKE-SMITH  et  al.  v.  WARDELL,  COLLECTOR 

(U.  S.  District  Court,  N.  D.  California,  Second  Div.,  Oct.  10, 1921) 
(Not  yet  reported) 

Memorandum  Decision:  Further  consideration  has  only 
tended  to  confirm  the  tentative  views  expressed  by  me  at  the  argu- 
ment that  these  cases,  so  far  as  concerns  the  controlling  question 
of  the  separate  legal  entity  of  the  Valley  Pipe  Line  Company  as 
affected  by  ownership  of  its  stock  by  the  Shell  Oil  Company  at  the 
time  the  taxes  sued  for  accrued  are  governed  by  the  principles 
announced  in  Pullman  Car  Co.  v.  Mo.  Pac.  Ry.  Co.,  115  U.  S.  537 ; 


545  U.  S.  TAX  CASES  939 

Peterson  v.  C.  R.  I.  &  P.  Ry.  Co.,  205  U.  S.  364;  and  the  recent 
case,  in  the  Circuit  Court  of  Appeals  of  the  Fifth  Circuit,  of  Walker 
V.  Gulf  &  I.  Ry.  Co.,  269  Fed.  885 ;  and  that  the  facts  do  not  bring 
the  cases  within  the  special  and  peculiar  situation  in  that  regard 
given  affect  in  Southern  Pacific  Co.  v.  Lowe,  247  U.  S.  330,  and 
Gulf  Oil  Company  v.  Lewellyn,  248  U.  S.  71.  The  latter  cases  will 
be  found  aptly  distinguished  and  differentiated  from  the  two  first 
mentioned  in  Walker  v.  Gulf  &  I.  Ry.  Co.  As  this  conclusion  pre- 
cludes recovery  by  plaintiffs  the  motion  for  non-suit  must  be 
granted  in  each  case  and  the  defendant  awarded  judgment  for 
his  costs. 

MERRIAM  V.  UNITED  STATES 
ANDERSON  v.  UNITED  STATES 

(U.  S.  Circuit  Court  of  Appeals,  Second  Cir.,  April  3,  1922) 
(Not  yet  reported) 

Record:  Revenue  Act  of  1913.  Action  to  recover  federal 
income  taxes.  Writ  of  error  to  the  U.  S.  District  Court  for  the 
Southern  District  of  New  York,  which  rendered  judgment  in  favor 
of  the  plaintiff.    275  Fed.  109,  ante  577.    Judgment  reversed. 

Facts :  The  will  of  Alfred  G.  Vanderbilt,  who  died  on  May  17, 
1915,  provided  as  follows:  "I  give  and  bequeath  to  •  *  • 
Frederick  M.  Davies,  $500,000.00;  to  Henry  B.  Anderson,  $200,- 
000.00;  to  Frederick  L.  Merriam,  $250,000.00  *  •  *.  The  be- 
quests herein  made  to  my  said  executors  are  in  lieu  of  all  com- 
pensation or  commissions  to  which  they  would  otherwise  be  entitled 
as  executors  or  trustees. ' '  Both  of  the  defendants  qualified  as  exec- 
utors, as  did  the  others  named,  excepting  Mr.  Davies,  who  died  five 
days  before  the  death  of  the  testator.  These  bequests  were  paid 
to  the  defendants  in  1915.  Each  of  the  defendants  made  a  return 
of  his  income  for  taxation  prior  to  March  15,  1916,  and  neither 
included  in  said  return  the  legacies  so  received. 

Questions:  (1)  Were  the  payments  in  question  given  as  con- 
sideration for  services  and  consequently  taxable  as  income  ? 

(2)  Were  the  bequests  to  the  defendants  legacies  within  the 
universally  accepted  and  legal  meaning  of  the  term  as  it  is  used 
in  the  Revenue  Act  of  1913  ? 


940  545  U.  S.  TAX  CASES 

Decision:  (1)  "We  think  Congress  contemplated  and  in- 
tended to  cover  payments  under  contracts  of  employment,  expressed 
or  implied,  and  intended  the  taxing  statute  to  reach  all  forms  of 
payment  for  services  rendered.  But  this  does  not  affect  the  inten- 
tion of  Congress  that  the  essential  factor  be  present  that  whatever 
is  sought  to  be  taxed  under  the  phrase  must  be  a  consideration  for 
work  performed  or  to  be  performed,  and  that  it  must  be  compen- 
sation derived  from  or  flowing  from  labor.  *  *  *  A  legacy 
acquired  by  bequest  does  not  proceed  from  labor.  The  question 
must  be  determined  not  by  the  phase  '  in  lieu  of  commissions, '  but 
upon  the  question  of  whether  the  bequest  was  in  fact  a  considera- 
tion for  services  to  be  rendered. ' ' 

(2)  "Bequests  are  either  absolute  or  conditional,  vested  or 
contingent.  It  was  not  essential  for  the  legatees  named  to  qualify 
in  order  to  become  entitled  to  their  legacies.  A  bequest  to  one  in 
lieu  of  compensation  for  his  services  which  is  conditional  only  upon 
his  willingness  to  qualify  and  serve  if  circumstances  permit  him 
to  do  so  is  nevertheless  a  legacy.  *  *  *  We  think  the  whole 
of  each  legacy  was  payable  independent  of  services.  It  was  an  ac- 
quisition to  each  legatee  by  bequest  within  the  meaning  of  the  tax- 
ing act  and  was  therefore  not  taxable  as  income. ' ' 

MIDDLETON  v.  MEE,  COLLECTOR 
AND  NINE  OTHER  CASES 

(U.  S.  District  Court,  D.  South  Dakota,  S.  D.,  Nov.  29,  1921) 
(277  Fed.  492) 

Record:  National  Prohibition  Act  and  R.  S.  Sec.  3224.  In 
equity.  On  motion  for  preliminary  injunction  and  motion  by  de- 
fendant to  dismiss.  Motion  to  dismiss  denied  and  injunction 
granted. 

Facts :  These  were  separate  suits  brought  to  restrain  the  col- 
lector from  distraining  property  of  plaintiff  to  collect  the  so-called 
double  tax  and  penalties  assessed  under  the  National  Prohibition 
Act.  In  the  Middleton  case,  which  is  typical  of  all  of  them,  the 
facts  were  as  follows:  The  plaintiff  operated  a  farm.  Federal 
agents,  without  his  consent,  searched  his  residence  and  seized  cer- 


545  U.  S.  TAX  CASES  941 

tain  personal  property.  Thereafter,  plaintiff  was  indicted  and  tried 
on  an  indictment  containing  two  counts ;  the  first  one  charged  him 
with  manufacturing  intoxicating  liquor,  and  the  second  with  un- 
lawful possession  of  certain  property  designed  for  the  manufacture 
of  intoxicating  liquor.  The  plaintiff  was  found  not  guilty  of  the 
first  count  and  guilty  of  the  second  count.  Subsequent  to  these 
criminal  proceedings  the  plaintiff  was  notified  by  defendant  that  a 
tax  had  been  assessed  against  him  as  a  retail  liquor  dealer  and  as 
a  manufacturer  of  intoxicating  liquor,  all  in  the  sum  of  $3,474. 
Defendant  was  about  to  sell  real  estate  of  the  plaintiff  to  satisfy 
such  taxes  and  penalties  for  non-payment  of  same,  when  this  bill 
was  filed. 

Question:  Are  the  so-called  taxes  imposed  under  National 
Prohibition  Act,  Title  2,  Section  35,  penalties,  and  if  so,  can  a  suit 
to  enjoin  their  collection  by  the  collector  by  distraint  and  sale  of 
property  be  maintained? 

Decision :  "I  believe,  however,  that  a  defendant,  charged  with 
a  violation  of  this  statute,  should  have  his  day  in  court,  and  an  inter- 
pretation of  this  statute  that  closes  to  him  forever  the  hope  of  finan- 
cial progress,  by  placing  this  lien  against  him,  is  to  imply  an  intent 
and  purpose  on  the  part  of  Congress,  inconsistent  with  the  intent 
and  purpose  of  the  act.  I  am,  therefore,  of  the  opinion  that  such 
of  these  provisions  of  the  Volstead  Act  as  may  be  enforced  against 
violators  of  that  law  are  penalties,  and  not  taxes;  that  such  pen- 
alties can  not  be  assessed  by  an  internal  revenue  collector,  without 
giving  the  person  charged  his  day  in  court.  Finally,  the  procedure 
by  distraint  for  the  collection  of  these  penalties,  as  threatened  in 
these  cases,  can  not  be  sanctioned.  There  has  been  no  adjudication 
in  court  as  to  the  liability  of  the  plaintiffs.  This  liability  is  denied. 
There  has  been  no  hearing.  Distraint  under  such  circumstances  is 
not  due  process  of  law." 

MILES,  COLLECTOR  v.  THE  SAFE  DEPOSIT  &  TRUST  CO. 

OF  BALTIMORE,  GUARDIAN 

(U.  S.  Supreme  Court,  May  29,  1922) 

(Not  yet  reported) 

Record:     Revenue  Act  of  1918.     Suit  to  recover  taxes  paid 

under  protest.     On  writ  of  error  to  U.  S.  District  Court,  District 


942  545  U.  S.  TAX  CASES 

of  Maryland,  which  rendered  judgment  for  the  defendant  in  error 
(plaintiff  below),  273  Fed.  822,  ante  439.    Judgment  affirmed. 

Facts :  Defendant  in  error,  as  guardian  for  Frank  R.  Brown, 
an  infant,  sold  the  subscription  right  to  35  shares  of  stock  of  the 
Hartford  Fire  Insurance  Company  for  $12,546.80.  This  right  re- 
sulted from  a  resolution  of  the  stockholders  of  the  corporation,  sanc- 
tioning an  increase  in  the  capital  stock,  and  providing  that  the  new 
issue  should  be  offered  to  the  stockholders  at  $150  per  share,  in 
the  proportion  of  one  share  of  new  stock  to  each  share  of  stock  held 
by  them.  The  cost  of  the  old  stock  held  by  the  defendant  in  error 
was  $710  per  share,  so  that,  had  the  subscription  right  been  exer- 
.cised  instead  of  sold,  the  defendant  in  error  would  have  had  70 
shares  of  stock  in  place  of  35  shares  held  before,  at  a  cost  of  $710 
plus  $150,  or  $860,  making  the  cost  of  each  share  $430.  The  Com- 
missioner of  Internal  Revenue  held  that  the  entire  amount  of 
$12,546.80  was  taxable  income  and  assessed  and  collected  tax  ac- 
cordingly. The  trial  court  held  that  the  sale  of  the  subscription 
rights  at  $358.48  per  share,  the  purchaser  to  pay  the  issuing  com- 
pany $150  per  share  was  equivalent  to  a  sale  of  the  fully  paid 
shares  at  $508.48  each,  or  $78.48  in  excess  of  the  $430  which  repre- 
sented their  cost  to  defendant  in  error;  and  this  difference  multi- 
plied by  35,  the  number  of  shares  or  rights  sold,  yielded  $2,746.80 
as  the  gain  realized  out  of  the  entire  transaction. 

Questions:  (1)  Is  a  right  to  subscribe  to  additional  shares  of 
stock  income  to  the  stockholder  receiving  such  right? 

(2)  How  should  the  gain  upon  the  sale  of  rights  to  subscribe 
for  stock  be  computed? 

Decision:  (1)  "The  right  to  subscribe  to  the  new  stock  was 
but  a  right  to  participate,  in  preference  to  strangers,  and  on  equal 
terms  with  other  existing  stockholders,  in  the  privilege  of  contrib- 
uting new  capital  called  for  by  the  corporation, — an  equity  that  in- 
heres in  stock  ownership  under  such  circumstances  as  a  quality 
inseparable  from  the  capital  interest  represented  by  the  old  stock, 
recognized  so  universally  as  to  have  become  axiomatic  in  American 
corporation  law.  •  •  •  The  stockholder 's  right  to  take  his  part 
of  the  new  shares,  therefore, — assuming  their  intrinsic  value  to  have 


545  U.  S.  TAX  CASES  943 

exceeded  the  issuing  price, — was  essentially  analagous  to  a  stock 
dividend.  So  far  as  the  issuing  price  was  concerned,  payment  of 
this  was  a  condition  precedent  to  participation,  coupled  with  an 
opportunity  to  increase  his  capital  investment.  In  either  aspect, 
or  both,  the  subscription  right  of  itself  constituted  no  gain,  profit, 
or  income  taxable  without  apportionment  under  the  Sixteenth 
Amendment. ' ' 

(2)  '* To  treat  the  stockholders'  right  to  the  new  shares  as  some- 
thing new  and  independent  of  the  old,  and  as  if  it  actually  cost  noth- 
ing, leaving  the  entire  proceeds  of  sale  as  gain,  would  ignore  the 
essence  of  the  matter,  and  the  suggestion  cannot  be  accepted.  The 
district  court  proceeded  correctly  in  treating  the  subscription  rights 
as  an  increase  inseparable  from  the  old  shares,  not  in  the  way  of 
income,  but  as  capital ;  in  treating  the  new  shares  if  and  when  issued 
as  indistinguishable  legally  and  in  the  market  sense  from  the  old; 
and  in  regarding  the  sale  of  the  rights  as  a  sale  of  a  portion  of  a 
capital  interest  that  included  the  old  shares. ' ' 

MILL  CREEK  &  MINEIIILL  NAV.  &  R.  CO. 
V.  UNITED  STATES 

(U.  S.  District  Court,  E.  D.  Penn.,  November  22,  1917) 
(246  Fed.  1013) 

Record:  Section  24,  Judicial  Code.  Sec.  3327  R.  S.  Action 
to  recover  taxes  paid.  Judgment  for  plaintiff.  Affirmed  by  U.  S. 
Supreme  Court  without  opinion,  251  U.  S.  539. 

Facts :  The  collector  to  whom  the  taxes  here  sought  to  be  re- 
covered were  paid  passed  out  of  office,  and  the  action  was  originally 
commenced  against  his  successor  in  office.  It  was  ruled  that  the 
plaintiff  had  no  right  of  action  against  the  successor,  and  it  then 
abandoned  its  right  of  action  against  the  collector,  and  proceeded 
to  exercise  the  privilege  given  it  by  other  acts  of  Congress  to  insti- 
tute an  action  against  the  United  States  itself  as  defendant. 

The  plaintiff  "brought  suit"  or  claimed  to  have  done  so,  by 
the  filing  of  a  praecipe  upon  which  issued  a  writ  of  summons  in 
accordance  with  the  established  practice  of  the  court  in  like  suits 
against  individuals.    These  writs  were  served,  or  asserted  by  the 


944  545  U.  S.  TAX  CASES 

plaintiff  to  have  been  served,  by  lodging  them  with  the  District 
Attorney.  This  was  within  the  two-year  period  for  bringing  suit, 
provided  for  in  R.  S.  3227.  The  plaintiff  deferred  the  filing  of  the 
statement  of  claim  until  after  the  expiration  of  the  two  years.  The 
District  Attorney  denied,  or  at  least  doubted,  his  authority  to  rec- 
ognize service  of  the  writ  upon  him  as  bringing  the  United  States  as 
a  defendant  within  the  jurisdiction  of  the  court,  and  refused  to  view 
the  United  States  as  being  in  court.  When  a  statement  of  plain- 
tiff's claim,  however,  was  served  upon  him,  the  District  Attorney 
recognized  that  this  was  lawful  service  upon  the  United  States  and 
brought  it  into  court  as  a  defendant. 

Questions :  (1)  Does  time  operate  to  affect  the  remedy  as  one 
of  the  conditions  upon  which  it  is  given,  or  does  it  operate  through 
and  by  a  statute  of  limitations! 

(2)  What  procedure  is  to  be  followed  in  bringing  suit  against 
the  United  States  in  the  District  Court  for  the  recovery  of  taxes 
paid? 

(3)  Was  the  action  "brought"  by  the  service  of  the  writ  of 
sunmions,  or  was  it  barred  by  the  two-year  statute  because  the 
statement  of  claims  was  filed  after  the  expiration  thereof? 

Decision:  (1)  "The  distinction  indicated,  though  important 
enough  in  itself  and  carrying  at  times  important  practical  conse- 
quences, does  not  seem  to  be  of  practical  value  in  the  instant  case. 
A  few  general  observations  may  clarify  our  view  of  the  broad  ques- 
tions involved  and  thus  enable  us  to  get  a  clearer  view  of  the  nar- 
rower questions  with  which  we  are  concerned.  One  of  the  proposi- 
tions advanced  by  counsel  for  the  United  States  is  undoubtedly 
sound,  and,  as  was  to  be  expected,  is  admitted  in  all  its  fullness  by 
counsel  for  defendant.  The  proposition  is  that  the  United  States 
can  not  be  sued,  except  as  it  may  consent,  and  the  right  to  sue, 
when  given,  must  be  exercised  in  compliance  with  the  terms  and 
conditions  of  that  consent.  •  •  •  This  immunity,  however, 
flowing  as  it  does  from  the  attribute  of  sovereignty,  does  not  belong 
to  the  individual  tax  gatherer.  Whatever  power  he  has  flows  from 
the  law,  and,  if  he  asserts  to  the  damage  of  anyone  a  power  which 
the  law  has  not  conferred  upon  him,  he  does  a  wrongful  act,  and 


545  U.  S.  TAX  CASES  945 

the  damage  thereby  done  to  another  becomes  a  legal  injury,  for 
which  the  injured  person  has  a  legal  right  of  redress  against  the 
wrongdoer.  The  right  thus  possessed  is  not  conferred  by  any  stat- 
ute, but  is  a  common-law  right,  which  exists  until  it  has  been  taken 
away  or  limited  by  statute.  *  *  *  A  like  obligation  to  return 
moneys  to  which  the  sovereign  had  no  just  claim  would  also  be 
recognized.  The  general  situation  as  thus  outlined  has  brought 
about  two  kinds  of  legislation.  The  one  is  embodied  in  a  series  of 
acts  by  which  the  United  States  has  expressed  its  willingness  and 
consent  to  be  made  a  defendant  in  defined  cases  and  has  subjected 
itself  to  the  process  of  the  courts.  The  other  kind  of  legislation  has 
given  recognition  to  the  claims  of  governmental  agents  to  indemnity 
for  the  legal  consequences  of  official  acts  performed  in  good  faith, 
and  provision  is  made  for  their  reimbursement  by  the  return  of 
any  moneys  which  they  as  individuals  may  have  been  compelled 
to  pay  because  of  what  was  really  an  official  act,  and  actions  against 
them  are  regulated.  If  the  United  States  gives  consent  to  the  issu- 
ance of  process  against  it,  provided  the  process  issues  within  a  lim- 
ited time  after  the  claim  for  redress  arose,  this  limitation  is  strictly 
a  condition  of  the  remedy  given,  and  not  a  statute  of  limitations  in 
bar  of  the  action.  The  common-law  right  of  action,  however,  to 
which  we  have  adverted,  being,  as  already  observed,  a  right  belong- 
ing to  the  plaintiff,  exists  until  it  is  taken  away  by  statute,  and  may 
be  enforced  at  any  time,  unless  and  until  it  is  barred  by  a  statute 
of  limitations.  Such  latter  statutes,  therefore,  in  reference  to  such 
common-law  right  of  action  are  strictly  and  technically  statutes  of 
limitation,  and,  generally  speaking,  statutes  of  limitation  which 
apply  to  other  actions  apply  to  these  actions.  Kecurring  again  to 
actions  against  the  United  States,  the  right  to  which  did  not  belong 
to  the  plaintiff,  except  as  given  by  statute,  such  actions  may  be 
brought  and  prosecuted  in  accordance  with  the  conditions  of  the 
grant  of  the  right,  and  with  respect  to  the  time  within  which  they 
may  be  brought,  the  United  States  may,  if  Congress  so  disposes,  be 
less  indulgent  to  itself  than  to  other  defendants. ' ' 

(2)  "Section  24(20)  of  the  Judicial  Code  •  *  •  provides 
a  method  for  the  assertion  of  claims  by  suit  against  the  United 
States,  so  far  as  concerns  the  District  Courts,  by  conferring  upon 


946  545  U.  S.  TAX  CASES 

these  courts,  concurrently  with  the  Court  of  Claims,  jurisdiction 
of  all  claims  against  the  United  States  (with  some  exceptions) 
which  could  be  asserted  by  action  if  the  United  States  was  suable. 
It  specifically  prescribes  no  system  of  process  to  be  followed  by 
the  District  Courts,  but  the  concurrence  of  jurisdiction  with  that 
of  the  Court  of  Claims  would  imply  a  sanction  of  like  process,  and 
the  limitation  provision  in  the  statute  carries  a  direct  implication 
of  the  sanction  of  the  writ  of  summons  process.  A  condition  of  the 
situation,  with  respect  to  which  Congress  was  legislating,  pre-exist- 
ent  to  the  statute,  may  help  us  in  construing  it.  The  District 
Courts  had  already  been  constituted  and  had  established  methods 
of  procedure  and  process.  Courts  of  Claims  had  no  such  existence 
and,  of  course,  no  method  of  procedure.  There  was  no  practical 
necessity  to  enact  a  procedure  system  for  the  District  Courts ;  there 
was  such  necessity  to  provide  a  system  for  the  Court  of  Claims. 
There  is  room  because  of  this  for  the  inference  (if  there  is  verbal 
warrant  for  it  in  the  Act  itself)  that  it  was  in  accord  with  the  will 
of  Congress  that  the  Court  of  Claims  should  follow  the  mode  of 
procedure  set  forth  in  the  Act,  but  that  the  District  Courts  might 
follow  their  established  practice,  or  adopt  that  established  for  the 
guidance  of  the  Court  of  Claims.  We  think  the  above-men- 
tioned provisions  of  the  Act  sanction  this  construction  of  it.  Sec- 
tion 156  of  the  Judicial  Code  (Comp.  St.,  1916,  Sec.  1147)  indi- 
cates the  filing  of  a  petition  by  limiting  the  time  within  which  it 
must  be  filed.  The  limitation  provision  of  the  twentieth  section 
indicates  the  commencement  of  an  action  and  is  consistent  with 
the  thought  of  the  issuance  of  a  writ  of  summons.  As  the  time 
limitation  is  the  same  in  each  of  these  sections,  the  coincidence  sug- 
gests these  different  modes  of  procedure  and  provides  a  limitation 
in  each  case,  or,  in  other  words,  in  effect  provides  that,  if  the  action 
permitted  to  be  brought  is  brought  through  and  by  the  writ  of 
summons  process,  the  closing  of  time  upon  the  action  is  marked 
by  the  impetration  of  the  writ,  but,  if  the  petition  procedure  is  fol- 
lowed, then  the  date  of  the  filing  of  the  petition  marks  the  time 
limit.  In  still  other  words,  there  is  standing  ground  for  the  con- 
struction that  if  the  claim  is  prosecuted  in  the  Court  of  Claims,  the 
filing  of  the  petition  determines  the  question  of  whether  the  pro- 


545  U.  S.  TAX  CASES  947 

ceeding  has  been  begun  in  time,  but  if  an  action  be  brought  in  the 
District  Court  by  writ  of  summons,  the  question  is  to  be  deter- 
mined by  the  date  of  the  writ. ' ' 

(3)  "Sections  20  and  156  of  the  Judicial  Code  each  give  six 
years '  time  within  which  plaintiffs  may  assert  their  claims  by  legal 
process.  Judged  by  these  sections,  the  present  actions  were  brought 
in  time.  There  are,  however,  other  statutes  limiting  the  time  within 
which  suits  may  be  brought  against  the  United  States.  This  other 
provision  is  expressed  in  Revised  Statute  Section  3227  (Comp.  St., 
1916,  Sec.  5950),  which  prescribes  that  no  suit  shall  be  maintained 
to  recover  payment  of  taxes  collected  without  authority  of  law 
unless  brought  'within  two  years  next  after  the  cause  of  action 
accrued.'  Applying  this  provision  to  the  instant  cases,  we  find  it 
has  been  complied  with  by  the  plaintiffs  in  each  case  if  the  issuance 
of  a  writ  is  a  suit  brought  within  the  meaning  of  the  Revised  Stat- 
utes, but  has  not  been  complied  with  if  the  statements  of  claim  are 
by  this  statute  required  to  be  filed  within  the  two  years.  This 
brings  us  to  the  very  narrow  question  involved  here.  That  ques- 
tion is:  Does  the  impetration  of  the  writ  toll  the  statute  above 
quoted  (if  viewed  as  a  statute  of  limitations),  or  is  the  issuance  of 
the  writ  a  compliance  with  the  terms  and  conditions  upon  which 
the  right  of  action  is  conferred  (if  viewed  as  a  condition  of  the 
exercise  of  the  right  given)  ?  *  *  *  In  the  view  of  counsel  for 
the  United  States,  the  service  of  the  statement  was  in  law  the  com- 
mencement of  the  proceeding,  and  that  no  suit  had  been  'brought' 
until  this  statement  was  filed.  As  this  was  more  than  two  years 
after  the  cause  of  action  arose,  the  position  of  counsel  for  the  United 
States  is  that  the  plaintiff  in  each  case  has  lost  its  right  of  action. 
♦  *  *  We  are  unable  to  get  our  mind  in  accord  with  the  thought 
upon  which  this  defense  rests;  Our  view  is  that  jurisdiction  is  given 
to  the  District  Courts  to  determine  the  justness  of  claims  against 
the  United  States,  and  that  for  all  the  purposes  of  procedure  the 
United  States  is  to  be  regarded  as  is  any  other  defendant.  It  can 
not,  of  course,  be  made  a  defendant  without  its  consent ;  but,  when 
that  consent  is  once  given,  the  merits  of  the  claim  for  which  the 
action  is  permitted  to  be  brought  are  to  be  passed  upon  and  deter- 
mined as  if  the  claim  were  made  against  any  other  defendant.    Had 


948  545  U.  S.  TAX  CASES 

the  actions  as  brought  been  brought  against  a  citizen,  the  action 
would  have  been  found  to  have  been  brought  in  time,  and  the  same 
finding  must  be  made  against  the  United  States  as  a  defendant.  The 
ruling  is  not  that  a  distinction  could  not  have  been  made  in  favor  of 
the  United  States,  such  as  that  for  which  counsel  for  the  United 
States  contends,  but  it  is  that  no  such  distinction  has  been  declared. 
As  all  of  the  positions  taken  by  counsel  for  the  United  States  (ex- 
cept the  denial  that  the  issuance  of  a  writ  is  the  bringing  of  a  suit 
within  the  meaning  of  the  Acts  of  Congress  giving  the  District 
Courts  jurisdiction  of  claims  by  actions  against  the  United  States) 
may  be  deemed  well  taken  without  affecting  the  conclusion  reached, 
it  is  unnecessary  for  us  to  determine  whether  the  two-year  limita- 
tion applies  to  actions  brought  directly  against  the  United  States  to 
recover  excise  taxes,  the  payment  of  which  has  been  unjustly  ex- 
acted, or  only  to  those  actions  which  have  been  brought  indirectly 
against  the  United  States  through  the  collector  being  made  de- 
fendant." 

MILLS  WOVEN  CARTRIDGE  BELT  COMPANY  v.  MALLEY 

(U.  S.  District  Court,  D.  of  Mass.,  May  26,  1922) 
(Not  yet  reported) 

Record:  Munition  Manufacturers'  Tax.  Motion  to  set  aside 
verdict  of  jury  overruled. 

Facts:  This  case  arose  under  the  provisions  of  Title  III  of 
the  Act  of  September  8,  1916,  and  involved  the  question  of  whether 
the  belt  which  carries  the  ammunition  used  in  connection  with  the 
Vickers  machine  gun  was  taxable  as  a  "part"  or  "appendage." 
The  case  was  tried  before  a  jury  which  rendered  a  verdict  that  the 
cartridge  belt  was  a  "part"  or  "appendage." 

Decision:  "The  statute,  considered  as  a  whole,  plainly  indi- 
cated a  general  intention  to  tax  profits  on  such  articles  as  these 
cartridge  belts.  On  one  side  of  them  profits  on  the  gun  and  its 
parts  are  taxed,  and  on  the  other  side,  profits  on  ammunition.  The 
plaintiff's  contention  is  in  effect  that  this  belt,  which  is  used  with 
the  gun  and  carries  the  ammunition,  slips  out  of  the  tax  because 
the  language  does  not  clearly  cover  it.    But  in  view  of  the  obvious 


545  U.  S.  TAX  CASES  949 

legislative  intent  underlying  the  statute,  the  words  employed  are 
not,  in  my  opinion,  so  restricted  and  precise  as  to  prevent  giving 
effect  to  the  intention.  These  belts  were,  it  seems  to  me,  properly 
regarded  by  the  Department  as  'parts'  or  'appendages'  of  ma- 
chine guns  under  the  statute  in  question;  and  as  such  the  profits 
upon  them  were  taxable. '  * 

NICHOLS,  COLLECTOR  v.  GASTON  et  al.,  EXECUTORS 

(U.  S.  Circuit  Court  of  Appeals,  First  Cir.,  March  21,  1922) 
(281  Fed.  67) 

Record :  Revenue  Act  of  1918.  Bill  for  an  injunction  to  re- 
strain the  defendant  collector  from  collecting  an  estate  tax.  In- 
junction granted  in  District  Court.  Defendant  appeals.  Decree 
of  District  Court  reversed  and  case  remanded  to  that  court  with 
instructions  to  enter  a  decree  of  dismissal. 

Facts :  The  plaintiffs  as  executors  for  a  decedent  who  died  on 
November  29,  1920,  filed  an  estate  tax  return  on  which  the  Com- 
missioner of  Internal  Revenue  assessed  a  tax  of  $83,900.36.  It  was 
conceded  that  this  tax  was  legal  and  proper,  but  the  plaintiffs  con- 
tended that,  under  Section  408  of  the  statute,  they  were  given  a 
year  and  180  days  after  the  testator's  death  in  which  to  pay  the 
tax,  even  though  the  Commissioner  of  Internal  Revenue  had  not 
extended  the  time  of  payment  under  Section  406  for  180  days  after 
its  due  date,  and  that  the  defendant  was  not  authorized  to  enforce 
its  collection  by  distraint  or  otherwise  until  after  the  expiration 
of  the  180  days.  The  defendant  collector  had,  on  the  4th  of  Janu- 
ary, 1922,  and  before  the  180  days  had  expired,  notified  the  plain- 
tiffs that,  unless  the  tax  was  paid  within  ten  days,  he  would  proceed 
to  collect  the  same,  with  costs,  by  seizure  and  sale  of  property. 
The  plaintiffs  further  alleged  in  their  bill  that  they  were  without 
any  legal  remedy,  and  that  irreparable  injury  would  be  sustained 
by  the  estate  in  the  loss  of  interest  if  the  money  were  paid  before 
the  expiration  of  180  days. 

Questions:  (1)  Did  the  U.  S.  District  Court  have  jurisdic- 
tion over  this  action  ? 


950  545  U.  S.  TAX  CASES 

(2)  Were  the  plaintiffs,  on  the  facts  above  stated,  entitled  to 
injunctive  relief? 

(3)  In  view  of  Section  3224,  Revised  Statutes,  which  provides 
that  "no  suit  for  the  purpose  of  restraining  the  assessment  or  col- 
lection of  any  tax  shall  be  maintained  in  any  court, ' '  can  this  pro- 
ceeding be  maintained? 

(4)  Was  the  defendant,  in  attempting  to  collect  this  tax,  act- 
ing under  color  of  authority  ? 

Decision:  (1)  A  suit  in  equity  by  the  executors  of  an  estate 
against  the  collector  of  internal  revenue  individually  and  as  collec- 
tor to  restrain  him  from  collecting  a  tax  assessed  against  the  estate 
under  Title  IV  of  the  Revenue  Act  of  1918  is  one  involving  a  con- 
troversy arising  under  the  laws  of  the  United  States,  and  hence  the 
United  States  District  Court  as  a  Federal  court  has  jurisdiction 
thereof. 

(2)  "It  thus  appears  from  the  language  of  the  Act  that  had 
the  complainants  paid  the  tax  under  protest  at  the  time  it  was 
demanded,  they  could  have  recovered  judgment  against  the  collec- 
tor for  all  damages  they  sustained,  if  the  collection  was  premature 
and  they  were  thereby  damaged.  •  *  •  they  would  have  been 
entitled  to  interest  on  the  damages  sustained  down  to  the  entry  of 
final  judgment,  and  *  *  *  upon  a  certificate  of  probable  cause 
by  the  court,  under  Section  989  of  the  Revised  Statutes,  the  liability 
of  the  Government  to  pay  the  judgment  would  attach.  *  *  • 
We  are  therefore  of  the  opinion  that  the  complainants  have  failed 
to  show  that  they  would  have  had  no  remedy  at  law.  On  the  con- 
trary, it  would  seem  that  they  would  have  had  a  legal  remedy  by 
which  they  might  have  been  reimbursed  for  all  damages  sustained, 
in  case  it  should  be  found  that  the  defendant  was  not  authorized 
to  demand  and  enforce  the  collection  of  the  tax  within  the  180  days 
after  it  became  due,  and  that  the  court  below  was  without  authority 
to  grant  the  injunction,  irrespective  of  the  inhibition  contained  in 
Section  3224  of  the  Revised  Statutes. ' ' 

(3)  "In  view  of  the  conclusion  reached,  we  do  not  feel  called 
upon  to  decide  whether  Section  3224  imposes  upon  a  court  of  equity 
any  greater  restraint  as  to  enjoining  the  assessment  and  collection 


545  U.  S.  TAX  CASES  951 

of  a  tax  than  it  would  properly  be  called  upon  to  exercise  had 
the  statute  not  been  enacted.  The  remedy  at  law  is  regarded  as 
exclusive  and,  in  the  absence  of  extraordinary  circumstances  such 
as  would  warrant  the  interposition  of  a  court  of  equity,  has  always 
been  held  to  be  exclusive.  *  *  *  It  would  seem,  however,  that 
the  inhibition  of  Section  3224  applies  to  all  assessments  or  collec- 
tions of  internal  revenue  taxes  made  or  attempted  to  be  made  under 
color  of  office  by  internal  revenue  ojBficers  charged  with  general  juris- 
diction over  the  assessment  and  collection  of  such  taxes,  and  that, 
if  the  Commissioner  of  Internal  Kevenue,  in  assessing  a  tax,  or  the 
collector,  in  collecting  it,  acts  under  color  of  his  office.  Section  3224 
applies,  and  that  no  suit  to  restrain  the  assessment  or  collection  of 
the  tax  can  be  maintained." 

(4)  In  view  of  the  provisions  of  Sections  404,  1305,  and  1307 
of  the  Revenue  Act  and  Sections  3182,  3183,  3184,  and  3187  of  the 
Revised  Statutes,  it  was  the  duty  of  a  collector  of  internal  revenue 
to  whom  the  Commissioner  of  Internal  Revenue  certified  an  estate 
tax  in  his  list  for  collection,  to  proceed  to  collect  the  tax,  and  such 
collector  in  demanding  payment  of  the  tax,  and,  on  nonpayment 
thereof,  in  issuing  a  distraint  warrant  and  enforcing  collection, 
acted  under  color  of  his  office  and  his  acts  were  not  purely 
ministerial. 

PAGE,  COLLECTOR   v.  POLK 

(U.  S.  Circuit  Court  of  Appeals,  First  Cir.,  May  16,  1922) 
(281  Fed.  74) 

Record :  Revenue  Act  of  1918.  Suit  to  enjoin  the  defendant 
collector  from  proceeding  to  collect  an  estate  tax  by  distraint.  Ap- 
peal from  the  U.  S.  District  Court  for  the  District  of  Rhode  Island, 
which  granted  an  injunction.  276  Fed.  128.  Decree  of  District 
Court  reversed  and  case  remanded  to  that  court  with  direction  to 
enter  a  decree  dismissing  the  bill  with  costs  to  the  appellant  in  this 
court  and  in  the  District  Court. 

Facts :  This  suit  arose  by  injunction  brought  against  the  col- 
lector to  restrain  him  from  collecting  an  estate  tax  assessed  against 
the  estate  of  the  decedent  in  the  sum  of  .$245,787.67,  under  Title  VI 
of  the  Revenue  Act  of  1918.    The  amount  of  the  tax  assessed  was 


952  545  U.  S.  TAX  CASES 

conceded  to  be  legal  and  proper  but  the  plaintiffs  contended  that 
under  Section  408  of  the  Revenue  Act  of  1918  they  were  given  a 
year  and  180  days  after  the  testator's  death  in  which  to  pay  the 
tax,  although  the  Commissioner  of  Internal  Revenue  had  not  ex- 
tended the  time  of  payment,  as  provided  in  Section  406,  for  the 
period  of  180  days  after  the  due  date.  Complainant's  bill  alleged 
that  the  collector  was  not  authorized  to  enforce  the  collection  of  the 
tax  by  distraint  or  otherwise  until  after  the  expiration  of  180  days, 
that  any  action  by  distraint  or  otherwise  was  unauthorized  and  not 
done  by  him  in  his  official  capacity  or  with  color  of  law,  that  the 
complainants  were  without  any  legal  remedy,  and  that  irreparable 
injury  would  be  sustained  by  the  estate  in  the  loss  of  interest  if  the 
money  were  paid  before  the  expiration  of  180  days.  The  bill  was 
filed  October  4,  1921,  and  final  decree  enjoining  the  collector  was 
entered  by  the  District  Court  on  December  27,  1921.  Appeal  was 
filed  and  allowed  on  January  27,  1922.  On  February  10,  1922,  the 
180  days  having  nearly  elapsed,  complainants  paid  the  tax  to  the 
collector. 

Questions:  (1)  Were  the  complainants  entitled  to  an  injunc- 
tion? 

(2)  The  tax  having  been  paid,  should  the  appeal  be  dismissed 
on  the  ground  that  the  questions  presented  thereby  were  academic  ? 

Decision :  (1)  "The  facts  in  this  case,  so  far  as  they  relate  to 
the  right  of  the  appellees  to  restrain  the  appellant  from  collecting 
the  tax,  differ  in  no  respect  from  those  considered  by  us  in  Nichols 
V.  Gaston  et  al..  Executors,  supra,  in  which  it  was  held  that  the 
injunction  was  improperly  issued.  We  see  no  occasion  for  reced- 
ing from  the  views  there  expressed  and  are  of  the  opinion  that  the 
appellee 's  motion  should  be  denied,  the  decree  of  the  District  Court 
reversed  and  costs  awarded  the  appellant  in  this  court  and  in  the 
court  below." 

(2)  "Costs  having  been  decreed  against  the  appellant  from 
which  he  would  be  relieved  if  the  decree  should  be  reversed,  we 
think  the  case  must  be  considered  on  its  merits. ' ' 


545  U.  S.  TAX  CASES  953 

IN  RE  PAUSON'S  ESTATE 

PAUSON  et  al.  v.  CHAMBERS,  STATE  CONTROLLER 

(Supreme  Court  of  Calif.,  June  27,  1921) 

(199  Pae.  331) 

Record :  California  Inheritance  Tax  Act.  Application  by  the 
controller  to  fix  inheritance  tax  on  property  transferred  in  contem- 
plation of  death.    Appeal  from  order  fixing  tax.    Affirmed. 

Facts :  At  the  time  of  the  transfer  the  decedent,  Pauson,  was 
78  years  of  age  and  in  vigorous  health.  He  consulted  an  attorney, 
stating  that  it  was  his  intention  to  transfer  all  his  property  to  a 
corporation  to  be  organized  under  the  name  of  Frank  Pauson  & 
Sons.  The  corporation  was  subsequently  formed  and  the  deceased 
transferred  to  it  about  $600,000  of  property  in  consideration  for 
the  entire  capital  stock,  40  shares  of  which  were  issued  to  each  of 
his  four  sons  and  20  each  to  four  daughters  and  one  share  to  the 
deceased.  The  shares  were  issued  in  1915.  The  deceased  was 
elected  president  of  the  corporation  and  voted  a  salary  of  $20,000, 
which  was  intended  to  cover  household  and  personal  expenses.  Less 
than  one  year  after  the  organization  of  the  corporation  the  deceased 
died,  but  from  a  sudden  acute  illness. 

Question :  Is  the  finding  of  the  trial  court  that  this  gift  was 
made  in  contemplation  of  death  sustained  by  the  evidence  ? 

Decision:  The  question  of  whether  or  not  a  gift  is  made  in 
contemplation  of  death  is  a  question  of  fact,  and  if  from  the  evi- 
dence the  trial  court  can  properly  infer  that  the  transfer  was  or 
was  not  made  in  contemplation  of  death,  the  finding  of  the  trial 
court  would  not  be  disturbed  although  the  conclusion  of  the  ap- 
pellate court  on  the  same  evidence  might  be  different. 

In  determining  whether  a  gift  was  made  in  contemplation  of 
death,  the  age  of  the  donor,  the  fact  that  he  transferred  all  of  his 
property,  that  it  was  a  very  large  fortune,  and  that  the  transfer 
was  made  for  the  benefit  of  his  heirs  and  in  such  fashion  that  as 
president  of  the  corporation  he  still  had  the  management  and  con- 
trol of  his  property  and  received  from  the  income  thereof  an  amount 
fully  commensurate  with  his  customary  expenditures,  are  most 
significant. 


954  545  U.  S.  TAX  CASES 

It  is  clear  in  this  case  that  the  trial  court  in  holding  that  gift 
in  question  was  made  in  contemplation  of  death  was  amply  sus- 
tained by  the  evidence. 

PENNSYLVANIA  CEMENT  CO.  v.  BRADLEY 

CONTRACTING  CO. 

(U.  S.  District  Court,  S.  D.  New  York,  July  7,  1920) 

(274  Fed.  1003) 

Record:  In  equity.  Suit  by  the  Pennsylvania  Cement  Com- 
pany against  the  Bradley  Contracting  Company,  in  which  receivers 
were  appointed  for  defendants.  On  petition  of  receivers  therein 
for  instructions.    Instructions  given. 

Facts :  On  May  21,  1920,  an  order  to  show  cause  was  issued, 
based  upon  the  receivers'  petition,  which  among  other  things 
prayed  this  court  to  instruct  the  receivers  as  to  "the  duty  of  the 
receivers  in  connection  with  any  taxes  payable  to  the  United  States 
Government  *  *  *  or  any  other  taxes  for  which  the  receivers 
or  this  estate  may  be  liable."  The  persons  served  with  this  order 
were  also  required  to  show  cause  substantially  why  a  dividend 
should  not  presently  be  paid  to  the  creditors  herein.  Service  of  this 
order  was  had  upon  the  United  States  District  Attorney,  the  Col- 
lector of  Internal  Revenue,  and  the  Commissioner  of  Internal  Reve- 
nue in  Washington,  as  well  as  other  parties  interested. 

It  further  appeared  that  the  receivers  had  on  hand  a  balance  of 
cash  amounting  to  about  $500,000,  but  that  such  sum  was  prac- 
tically all  derived  from  payment  of  a  certain  judgment.  This  judg- 
ment was  entered  in  an  action  brought  by  the  defendant  against  the 
City  of  New  York  for  damages  for  breach  of  a  contract  and  most 
of  the  recovery  had  was  for  a  loss  of  profits  or  gain  which  the 
defendant  company  would  have  made  if  it  had  been  permitted  to 
fulfill  its  contract.  After  receipt  of  this  money,  the  receivers  had 
applied  to  the  Treasury  Department  at  Washington  to  obtain  a 
ruling  in  respect  of  the  attitude  of  the  Department  regarding 
income  taxes  upon  this  money  under  the  Revenue  Act  of  1918,  which 
was  in  force  at  the  time  of  this  receipt,  but  the  Treasury  Depart- 
ment through  the  Commissioner  in  effect  declined  to  make  any 
ruling  at  aU. 


545  U.  S.  TAX  CASES  955 

Questions :  The  following  matters  raised  by  the  receivers'  peti- 
tion were  presented  to  the  court  for  decision : 

(1)  The  duty  of  the  receivers  in  respect  to  taxes  claimed  by 
or  to  be  claimed  by  the  United  States,  and 

(2)  The  declaration  of  a  dividend  at  the  present  time. 

Decision:  (1)  "As  to  the  statute  itself,  it  must  be  admitted 
that  in  one  sense  the  United  States  has  no  present  claim — i.  e.,  no 
presently  provable  claim — against  these  receivers,  if  the  proceeds  of 
the  judgment  against  the  City  of  New  York  are  to  be  regarded  as 
income  of  1920.  This  necessarily  follows  from  the  fact  that  an 
income  tax  is  not  upon  any  specific  sum  of  money,  but  is  a  personal 
tax,  measured  by  sums  of  money  received  (or  possibly  accrued)  to 
the  person  taxed  during  a  certain  period — i.  e.,  the  calendar  year — 
and  the  year  1920  is  not  expired. 

"Analogies  are  often  misleading,  yet  I  cannot  but  think  the 
analogy  of  bankruptcy  instructive.  In  bankruptcy  it  is  clear  law 
that  a  claim  not  due  is  not  provable,  and  that  a  discharge  is  valid 
only  against  provable  debts.  Therefore,  without  having  recourse  to 
any  of  the  statutes  giving  preference  or  priority  to  the  United 
States,  there  is  no  claim  presently  existing  on  the  part  of  a  taxing 
power.  It  is  therefore  difficult  for  me  to  see  how  this  court  can  at 
present  consider  the  validity  of  a  claim  that  does  not  legally  exist.  * ' 

With  reference  to  the  statutes  directed  again  fiduciaries  to 
insure  their  preservation  of  the  rights  of  the  United  States  the  court 
says :  * '  My  inference  from  these  statutes  and  the  decisions  under 
them  is  that,  while  receivers  are  not  mentioned  by  name  or  title, 
they  are  within  the  purview  of  the  act.  It  is  of  course  possible  to 
read  these  statutes  so  narrowly  as  to  say  that  they  speak  always  of 
'debts  due  to  the  United  States,'  and  that,  therefore,  if  a  fund  be 
distributed  when  there  is  no  debt  actually  due  to  the  United  States, 
the  custodian  of  the  fund  cannot  be  held  to  a  personal  liability  when 
the  debt  subsequently  arises.  But  I  cannot  so  read  the  statutes. 
*  *  *  A  fiduciary  who  hastened  distribution  before  the  due  date 
of  a  tax,  and  then  said,  I  have  nothing  to  pay  with,  would,  in  my 
judgment,  be  personally  responsible,  and  any  court  which  facilitates 
such  a  distribution  would  be  chargeable  with  judicial  wrongdoing. ' ' 


956  545  U.  S.  TAX  CASES 

"There  is  another  inquiry  germane  to  this  ease  which  seems 
to  me  to  be  answered  for  this  circuit  by  In  re  Heller,  258  Fed.  208, 
169  C.  C.  A.  276,  viz :  If  there  is  any  income  taxable  or  otherwise, 
whose  is  it?  Is  it  the  income  of  the  corporation  or  the  income  of 
the  receivers?  In  the  case  cited  it  was  held  that  under  the  Act  of 
1916  (Section  13c  [Coms.  St.  §  6336m] )  only  net  income  earned  by 
a  'trustee  while  operating  the  business  of  a  bankrupt  corporation' 
was  taxable.  In  other  words,  if  this  money  is  income  at  all,  it  is  the 
receivers'  income,  and  not  that  of  the  corporation." 

This  court  is  without  present  power  to  pass  on  the  rights  of 
the  United  States  as  to  any  sum  or  sums  of  money  received  by  these 
receivers  in  the  year  1920  and  asserted  to  be  income  by  the  taxing 
authorities  of  the  United  States.  * '  I  can  see  no  method  of  compell- 
ing the  officers  of  the  United  States  to  declare  a  policy,  give  an 
opinion,  make  a  promise,  or  obey  an  order  in  the  premises  until  after 
the  15th  day  of  March,  1921,  at  the  earliest. ' ' 

(2)  The  receivers  were  instructed  to  declare  no  dividend  until 
further  order  of  the  court,  because  the  United  States  assert  a 
demand  substantially  against  the  fund  in  question  which  is  not 
legally  capable  of  present  adjudication  except  by  consent,  which 
consent  has  been  withheld. 

PENROSE  V.  SKINNER,  COLLECTOR 

(U.  S.  District  Court,  Colorado,  Aug.  22,  1921) 
(278  Fed.  284) 

Record:  Act  of  October  3,  1913.  Action  to  recover  income 
tax  paid  under  protest.  On  motion  by  plaintiff  for  judgment  on 
the  pleadings.    Motion  overruled. 

Facts:  Within  the  time  required  by  the  act,  plaintiff  made 
an  individual  return  of  income  for  the  year  1913,  upon  which  was 
assessed  a  tax  of  $1,919.83,  which  the  plaintiff  paid.  The  net  income 
on  which  the  first  assessment  was  paid  was  obtained  by  deducting 
from  the  gross  a  large  amount  as  losses  sustained  and  "incurred  in 
trade"  on  account  of  corporate  stocks  owned  by  plaintiff,  some  of 
which  were  represented  as  worthless  and  others  as  worth  far  less 
than  cost.    After  investigation  these  losses  were  all  disallowed  by 


545  U.  S.  TAX  CASES  957 

the  Commissioner  and  a  second  assessment  upon  the  full  amount 
disallowed  as  losses  was  made.  The  plaintiff  applied  for  a  remis- 
sion of  this  assessment ;  a  hearing  was  had ;  and  the  point  at  issue 
was,  whether  the  facts  presented  by  the  plaintiff  brought  him 
within  the  class  of  persons  whose  occupation  permitted  them,  under 
treasury  rulings,  to  claim  the  deduction  of  "losses  actually  sus- 
tained during  the  year,  incurred  in  trade;"  i.  e.,  whether  plaintiff 
was  a  licensed  broker  or  member  of  a  stock  exchange  engaged  in 
buying  and  selling  securities  for  himself  and  others.  In  March, 
1916,  plaintiff's  application  was  sustained  and  the  second  assess- 
ment entirely  remitted  by  Commissioner  Osborn. 

In  December,  1918,  Commissioner  Roper  reassessed  the  amount 
claimed  as  losses  and  again  plaintiff  made  application  and  presented 
proof  for  remission  of  this  assessment,  on  the  same  ground,  but 
Commissioner  Roper  denied  the  application,  his  reason  therefore 
being  that  plaintiff  was  "neither  a  licensed  broker  nor  a  member 
of  any  stock  exchange  engaged  in  buying  and  selling  securities  for 
others  as  well  as  yourself."  Plaintiff  subsequently  paid  the  tax 
with  interest  under  protest  and  thereafter  brought  this  action. 

Questions:  (1)  Was  the  ruling  of  Commissioner  Osborn  in 
March,  1916,  remitting  the  assessment,  final  and  conclusive,  so  that 
the  subsequent  act  of  Commissioner  Roper  in  making  a  reassessment 
was  void? 

(2)  Was  the  reassessment  not  made  within  the  statutory  time 
and  so  void? 

(3)  Assuming  that  propositions  (1)  and  (2)  are  decided  in 
favor  of  the  plaintiff  would  that  dispose  of  his  motion  for 
judgment  ? 

(4)  Has  Section  250d  of  the  Act  of  February  24,  1919,  which 
provides  that,  no  suit  or  proceeding  for  the  collection  of  any  income 
tax  shall  be  brought  after  the  expiration  of  five  years  from  the  date 
when  the  return  was  due  or  was  made,  any  application  to  this  suit  ? 

Decision:  (1)  "If  it  were  necessary  to  pass  upon  the  first 
proposition  noted  above  I  would,  in  the  light  of  present  investiga- 
tion, decide  the  question  with  the  plaintiff.  No  authority  has  been 
vested  in  a  Commissioner  to  overrule  and  reverse  the  action  of  his 


958  545  U.  S.  TAX  CASES 

predecessor  in  office.  Commissioner  Osbom,  acting  under  his 
authority,  heard  and  determined  a  question  of  fact  necessary  to 
enable  him  to  act  intelligently  in  ascertaining  and  determining  the 
amount  of  plaintiff's  net  income  on  which  he  would  be  required  to 
make  the  levy  and  assessment,  and  his  finding  on  that  issue  not  hav- 
ing been  impeached  by  the  answer  should,  under  every  principle 
and  rule  of  law,  be  regarded  here  as  final. "     •    *     * 

(2)  "And  on  the  second  proposition  above  noted  I  would  hold 
against  the  contention  of  the  plaintiff,  if  it  were  now  necessary  to 
definitely  rule  upon  it. ' ' 

(3)  "But  in  my  judgment,  if  both  propositions  were  deter- 
mined in  favor  of  plaintiff  that  would  not  dispose  of  his  motion  for 
judgment ;  for  the  answer  sets  up  facts  in  defense  that  do  not  appear 
to  have  been  investigated,  considered  and  determined  at  the  hearing 
before  Commissioner  Osbom."  (The  answer  set  up  that  some  of 
the  losses  claimed  by  the  plaintiff  had  been  sustained  before  March 
1,  1913,  and  that  certain  other  pretended  losses  were  false.)  "The 
proof  presented  by  plaintiff  at  that  time"  (before  the  Commissioner 
at  the  hearing)  "discloses  that  the  one  question  of  fact  under  con- 
sideration was,  whether  he  came  within  the  class  of  persons  entitled 
to  claim  the  losses  under  the  ruling  theretofore  made  by  the  depart- 
mend  and  noted  above.  It  was  assumed  that  they  had  been  sustained 
and  incurred  within  the  tax  year,  as  claimed  by  the  plaintiff  in  his 
return.  The  answer  in  effect  alleges  that  the  return  was  false  in 
that  respect;  and  if  false,  the  deductions  claimed  should  not  have 
been  made,  and  the  tax  which  the  plaintiff  now  seeks  to  recover  was 
justly  exacted  from  him  regardless  of  whether  an  assessment  had 
or  had  not  been  made. "    *    *    *. 

"The  Act  of  October  3,  1913,  requires  that  every  citizen  having 
the  necessary  net  income  shall  pay  the  tax  annually,  and  if  the 
deductions  claimed  in  the  return  were  not  allowable  as  losses  sus- 
tained and  incurred  within  the  tax  year,  it  was  the  duty  of  the 
plaintiff  under  the  Act  to  pay  the  amount  which  he  now  sues  to 
recover.  If  it  had  not  been  paid  it  might  have  been  recovered  by 
an  action  against  him,  even  though  the  reassessment  made  by  Com- 
missioner Roper  was  a  void  act  on  his  part,  U.  S.  v.  Chafmberlin,  219 
U.  S.  250,  31  Sup.  Ct.  155,  55  L.  Ed.  204 ;  and  if  recoverable  against 


545  U.  S.  TAX  CASES  959 

him  in  an  action  brought  for  that  purpose  there  can  be  here,  of 
course,  no  implied  promise  for  its  return. ' ' 

The  period  of  limitations  fixed  in  Section  250d  of  the  Act  of 
February  24,  1919,  has  no  application  here  because  this  is  not  a 
suit  or  proceedings  for  the  collection  of  a  tax. 

' '  The  plaintiff 's  motion  for  judgment  in  his  favor  on  the  plead- 
ings must  be  overruled. ' ' 

PEOPLE  V.  TAVENER  et  aL 

(Supreme  Court  of  111.,  Dec.  22,  1921) 
(300  111.  373,  133  N.  E.-211) 

Record:  Illinois  Inheritance  Tax  Act.  Action  by  the  State 
to  charge  defendants  with  taxes  on  tracts  of  land  conveyed  to  them 
by  their  father.  Judgment  for  the  State,  and  defendants  appeal. 
Affirmed. 

Facts:  The  decedent,  Charles  Ruff,  was  the  owner  of  640 
acres  of  land.  He  lived  on  the  home  place  and  his  children,  the 
defendants,  lived  on  and  farmed  other  portions.  The  understand- 
ing between  decedent  and  his  children  was  that  the  children  were 
to  have  the  several  tracts  respectively  occupied  by  them  upon  the 
death  of  the  father.  In  1919  Ruff,  after  an  acute  attack  of  diabetes 
from  which  disease  he  had  been  a  sufferer  for  3  or  4  years,  executed 
four  deeds,  conveying  portions  of  the  land  to  the  children,  stating 
that  he  was  then  making  the  deeds  of  what  was  coming  to  them 
when  he  died.    Ruff  died  in  1920  at  76  years  of  age. 

Question :  (1)  Were  the  conveyances  in  question  made  in  con- 
templation of  death  ? 

(2)  Assuming  that  the  conveyances  were  made  in  contempla- 
tion of  death  is  their  taxable  status  affected  by  the  understanding 
or  agreement  between  the  grantor  and  grantees  described  above  ? 

Decision:  (1)  The  age  of  the  grantor,  his  physical  condition, 
the  existence  of  the  disease  of  such  a  character  as  was  practically 
certain  to  result  in  his  death,  and  his  apprehension  that  death  was 
impending,  make  it  certain  that  the  deeds  were  made  in  contempla- 
tion of  death. 


960  545  U.  S.  TAX  CASES 

(2)  The  understanding  between  the  father  and  defendants  that 
each  of  the  children  was  to  receive  his  portion  of  the  land  at  the 
father's  death  and  in  the  meantime  was  to  pay  rental  to  the  father, 
was  not  a  binding  agreement  for  the  conveyance  of  the  land  to  the 
children  before  his  death,  but  could  have  been  performed  by  devis- 
ing the  land  to  the  children,  and  therefore  did  not  prevent  the  con- 
veyances of  the  land  in  the  grantor's  lifetime,  but  in  contemplation 
of  death,  from  being  taxable. 

PEOPLE  ex  rel.  STAFFORD  v.  TRAVIS 

(Court  of  Appeals  of  N.  Y.,  May  31,  1921) 

(231  N.  Y.  239,  132  N.  E.  109) 

Record :  New  York  Income  Tax  Law.  Appeal  from  an  order 
affirming  a  determination  of  the  State  Comptroller  assessing  a  tax 
against  the  relator,  Stafford.    Reversed  and  remitted  to  Comptroller. 

Facts :  The  relator  was  a  resident  of  Connecticut  doing  busi- 
ness in  1919  and  since,  in  New  York  City.  On  June  16,  1920,  he 
made  a  return  of  income  for  the  year  1919  and  paid  his  tax  under 
protest.  He  thereupon  applied  to  the  comptroller  for  a  revision  of 
his  tax  and  upon  denial  of  his  petition  by  the  comptroller  after  a 
hearing,  he  obtained  a  certiorari  to  review  such  decision. 

Question:  May  a  state  validly  compel  nonresidents  doing 
business  within  its  boundaries  to  pay  a  tax  upon  the  net  income  of 
such  business  ? 

Decision :  The  tax  in  question  is  imposed  upon  business  done 
by  a  nonresident  in  this  state  no  greater  in  any  respect  than  the 
tax  imposed  upon  the  conduct  of  such  a  business  by  a  resident  of 
the  state.  It  is  measured  by  a  percentage  on  the  net  income  of  the 
business.    Such  a  tax  is  just  and  constitutional. 

However,  since  there  was  evidence  that  part  of  the  relator's 
sales  were  made  outside  of  New  York,  the  proceeding  is  remitted  to 
the  comptroller  to  determine  if  such  sales  were  consummated  out- 
side of  this  state,  and  if  so,  to  adjust  the  amount  of  the  net  income 
of  the  relator  from  such  sales  according  to  the  proportionate  amount 
of  business  done  in  making  the  purchase  of  the  goods,  and  forward- 
ing the  same  in  the  city  of  New  York,  and  the  sales  made  outside  of 
the  state  of  New  York. 


545  U.  S.  TAX  CASES  961 

PLANT  V.  WALSH,  COLLECTOR 

(U.  S.  District  Court,  D.  of  Conn.,  April  12,  1922) 

(280  Fed.  722) 

Record:    Act  of  October  3,  1913.    Action  to  recover  income 

taxes  assessed  in  1916  for  the  years  1913  and  1914  and  paid  under 

protest. 

Facts:  The  facts  in  this  case  are  presented  under  the  head- 
ings "Question"  and  ''Decision"  below. 

Question:  (1)  Was  the  taxpayer  rightly  assessed  on  the  sum 
of  $60,455.61  representing  corporate  dividends  declared  prior  to 
March  1,  1913,  and  payable  subsequent  to  March  1,  1913,  to  stock- 
holders of  record  at  dates  prior  to  that  time  1 

(2)  Was  the  taxpayer  rightly  assessed  on  the  sum  of  $95,820, 
representing  interest  due  March  1, 1913,  on  certain  corporate  bonds? 

(3)  Was  the  taxpayer  entitled  to  deduct  on  his  return  for  the 
year  1913,  the  sum  of  $43,749.16,  alleged  to  be  five-sixths  of  the 
amount  at  which  certain  bonds  ascertained  to  be  worthless  during 
the  year  1913  and  charged  off  on  December  31  of  that  year,  stood  on 
the  taxpayer's  books  on  March  1,  1913,  or  may  he  charge  off  only 
the  amount  of  the  actual  value  of  the  bonds  on  March  1,  1913  ? 

(4)  Was  the  taxpayer  entitled  to  deduct  losses  sustained  in 
the  years  1913  and  1914,  in  the  operation  of  a  farm,  as  business 
expenses  ? 

Decision:  (1)  The  first  question  has  been  decided  by  the  Cir- 
cuit Court  of  Appeals  for  the  Second  Circuit  in  United  States  v. 
Guinzburg,  — Fed. — .  ' '  It  was  held  there  that  corporate  dividends 
declared  February  17,  1913,  payable  July  1,  1913,  to  stockholders 
of  record  on  January  30,  1913,  were  income  when  declared  and  not 
when  paid.  *  *  *.  It  follows,  therefore,  that  the  ruling  in  the 
Guinzburg  case  must  be  followed  in  the  instant  case. ' ' 

(2)  "Another  question  is  whether  the  taxpayer  was  rightly 
assessed  on  the  sum  of  $95,820,  representing  interest  due  March  1, 
1913,  on  certain  corporate  bonds.  •  *  *.  I  think  that  as  to  this 
question  United  States  v.  Guinzburg,  supra,  is  conclusive.  The  basis 
of  that  decision  was  that  money  owing  to  the  taxpayer  is  income 
accrued  from  the  time  when  the  liability  to  pay  becomes  absolute, 


962  545  U.  S.  TAX  CASES 

though  it  is  not  yet  due.  If  the  interest  was  payable  for  the  sii 
months  ending  February  28,  1913,  the  liability  to  pay  became  abso- 
lute before  the  commencement  of  the  taxable  period  though  pay- 
ment was  not  due  until  the  first  day  of  that  period.  I  see  no  ground 
on  which  money  owing  by  a  corporation  for  interest  on  its  bonds 
can  be  distinguished  from  money  owing  it  for  a  dividend  which 
has  been  declared  on  its  stock,  and  therefore  hold  that  on  this  item 
also  the  taxpayer  was  improperly  assessed." 

(3)  Upon  the  next  question,  namely,  the  legality  of  the  deduc- 
tion of  $43,749.16,  as  a  loss  on  worthless  bonds,  the  court  points  out 
that  the  Act  of  1913  permitted  the  deduction  of  * '  Debts  due  to  the 
taxpayer  actually  ascertained  to  be  worthless  and  charged  off  within 
the  year,"  and  that  for  the  year  ending  December  31,  1913,  five- 
sixths  only  of  the  deduction  provided  for  by  that  Act  were  to  be 
allowed.  ' '  The  plaintiff  contends  that  all  the  statute  requires  him 
to  prove  is  that  the  debt  was  ascertained  to  be  worthless  and 
charged  off  within  the  year  1913.  This  he  has  done  by  the  undis- 
puted evidence.  The  effect  of  so  construing  the  statute  may  be  to 
permit  the  taxpayer  to  deduct  five-sixths  of  a  loss  accruing  prior  to 
the  commencement  of  the  taxable  period,  so  that  the  return  will  not 
reflect  his  entire  income  for  that  period.  But  Congress  has  the 
right  to  do  this  and  has  done  it  if  the  statute  is  to  be  literally  con- 
strued. In  case  of  doubt  a  tax  law  should  be  construed  in  favor  of 
the  taxpayer.  Gould  v.  Gould,  245  U.  S.  151.  Therefore,  I  con- 
clude that  the  taxpayer's  contention  should  be  sustained.  But  even 
if  the  burden  is  on  him  to  prove  the  value  of  the  bonds  on  March 
1, 1913, 1  think  he  has  met  the  burden  because  the  amount  at  which 
the  bonds  stood  on  his  books  on  March  1,  1913,  is  at  least  prima 
facie  evidence  of  their  actual  value  at  that  time. ' ' 

(4)  "The  plaintiff  also  complains  of  the  refusal  to  allow  as 
deductions  the  losses  sustained  by  Mr.  Plant  in  the  years  1913  and 
1914  in  the  business  of  farming.  •  •  *.  The  only  question 
involved  in  connection  with  this  claim  is  whether  Mr.  Plant  was 
engaged  in  farming  as  a  business  or  merely  for  pleasure.  The  evi- 
dence shows  that  he  had  been  engaged  in  farming  since  1904  or 
1905.  He  kept  increasing  the  size  of  his  farm  until  in  1912  it 
numbered  several  hundred  acres.    He  had  not  made  any  profit  on 


545  U.  S.  TAX  CASES  963 

his  farm  prior  to  or  during  1914,  but  in  1912  he  formed  an  organi- 
zation of  experts  for  the  purpose  of  putting  the  farm  on  a  business 
basis  and  installed  an  elaborate  accounting  system  under  the  super- 
vision of  a  comptroller.  Large  quantities  of  farm  produce  were 
marketed  at  prevailing  prices  and  every  effort  was  made  to  establish 
the  farm's  reputation  as  a  high  class  modern  farm.  Mr.  Plant  gave 
a  good  deal  of  his  time  to  bringing  about  eflSciency  and  putting  the 
farm  on  a  paying  basis.  Notwithstanding  these  efforts  the  opera- 
tion of  the  farm  resulted  in  a  loss  for  1913  of  $107,680.70  or  about 
200  per  cent,  of  the  receipts  and  in  1914  of  $106,431.98,  including 
depreciation,  or  about  150  per  cent,  of  the  receipts. ' ' 

The  court  then  alludes  to  the  argument  of  the  defendant  that 
the  great  excess  of  expenses  over  receipts  proved  that  farming  was 
a  pleasure  or  hobby  with  Mr.  Plant  and  not  a  source  of  profit  and 
therefore  the  expense  of  conducting  the  farm  was  not  a  business 
expense.  "I  think  however,  that  the  evidence  establishes  clearly 
that  Mr.  Plant's  farm  was  conducted  as  a  business  enterprise  and 
with  the  expectation  that  it  would  eventually  become  profitable. 
The  mere  fact  that  a  heavy  loss  was  incurred  in  the  initial  stages 
of  so  large  an  enterprise  does  not  necessarily  show  the  contrary. 
But  even  though  this  is  not  so,  I  do  not  believe  that  farming  when 
engaged  in  as  a  regular  occupation  and  in  accordance  with  recog- 
nized business  principles  and  practices,  is  any  the  less  a  business 
vdthin  the  meaning  of  the  statute  because  the  person  engaging  in  it 
is  willing  to  do  so  without  regard  to  its  profitableness  because  of  the 
pleasure  derived  from  it. ' ' 

PLUMMER  V.  COLER 

(U.  S.  Supreme  Court,  May  14,  1900) 
(178  U.  S.  115) 

Record:  Inheritance  Tax  Law  of  New  York.  Error  to  Sur- 
rogate's Court,  County  of  New  York,  State  of  New  York,  affirming 
an  order  imposing  the  tax.    Judgment  affirmed. 

Facts:  By  the  will  of  a  decedent,  $40,000  in  United  States 
bonds  was  bequeathed  to  the  executor  in  trust,  in  giving  the  bene- 
ficiaries a  life  interest  in  the  income.    The  value  of  this  life  interest 


964  545  U.  S.  TAX  CASES 

was  computed  by  the  appraisers  at  $16,120,  and  a  tax  of  $161.20 
assessed. 

Question :  Under  the  Inheritance  Tax  Law  of  a  state,  may  a 
tax  be  validly  imposed  on  a  legacy  consisting  of  United  States 
bonds  issued  under  a  statute  declaring  them  to  be  exempt  from 
state  taxation  in  any  form  ? 

Decision :  *  *  "We  think  the  conclusion,  fairly  to  be  drawn  from 
the  state  and  federal  cases,  is  that  the  right  to  take  property  by 
will  or  descent  is  derived  from  and  regulated  by  municipal  law; 
that,  in  assessing  a  tax  upon  such  right  or  privilege,  the  state  may 
lawfully  measure  or  fix  the  amount  of  the  tax  by  referring  to  the 
value  of  the  property  passing,  and  that  the  incidental  fact  that  such 
property  is  composed,  in  whole  or  in  part,  of  federal  securities,  does 
not  invalidate  the  tax  or  the  law  under  which  it  is  imposed." 

THE  PROCTOR  &  GAMBLE  CO.  v.  UNITED  STATES 

THE  BUCKEYE  COTTON  OIL  CO.  v.  UNITED  STATES 

(U.  S.  District  Court,  S.  D.  of  Ohio,  W.  D.) 

(281  Fed.  1014) 

Record:  Revenue  Acts  of  1917  and  1918.  Suits  to  recover 
taxes  paid  under  Title  V,  Sections  500-503  of  the  Act  of  1917  and 
Title  V,  Sections  500-502  of  the  Act  of  1918.  In  each  case  demur- 
rers were  filed  to  the  petition.    Demurrers  sustained. 

Facts :    See  Questions  below. 

Questions:  (1)  Should  demurrage  charges  for  failure  to  load 
and  unload  cars  within  the  "free  time"  allowed  by  the  rules  of 
railroad  companies  be  included  as  part  of  the  cost  of  transporta- 
tion and  thereby  subject  to  the  transportation  tax? 

(2)  Is  a  petition  for  recovery  of  a  tax  bad  on  demurrer  if  it 
does  not  contain  averments  showing  that  payment  was  made  under 
protest  or  duress  ? 

Decision:  (1)  "Demurrage  is  a  terminal  charge — a  part  of 
the  charge  for  transportation." 

(2)  "On  the  averments  made  in  their  respective  petitions  pay- 
ments were  not  made  under  protest  or  duress,  but  voluntarily. 
Recovery  therefore  cannot  be  had. ' ' 


545  U.  S.  TAX  CASES  965 

PUBLIC  SERVICE  CORPORATION  v.  HEROLD 

(U.  S.  Circuit  Court  of  Appeals,  Third  Cir.,  Feb.  23,  1922) 
(279  Fed.  352) 

Record:  Revenue  Act  of  1916.  Action  to  recover  taxes  paid 
under  protest.  Judgment  for  defendant.  273  Fed.  282,  ante  415. 
Judgment  reversed. 

Facts:  In  a  suit  brought  against  the  defendant  collector  to 
recover  taxes  illegally  collected  under  the  Revenue  Act  of  1909 
(Public  Service  Company  v.  Herold,  229  Fed.  902,  ante  416), 
it  was  held  that  taxes  paid  for  the  years  1909  and  1911  could 
not  be  recovered  because  no  claim  for  refund  had  been  made 
within  the  two  years  provided  by  Sec.  3228,  R.  S.  The  Act  of  1916, 
subsequently  passed,  contained  a  provision  that  taxpayers  shall  be 
permitted  to  present  a  claim  for  refund  of  taxes  overpaid  under 
the  Act  of  August  5,  1909,  notwithstanding  the  provisions  of  Sec. 
3228,  R.  S.  Acting  under  the  supposed  authority  of  this  Act,  the 
plaintiff  filed  claims  for  refund  of  the  taxes  in  question,  which 
claims  were  finally  rejected  by  the  Commissioner  in  December, 
1917,  whereupon  this  suit  was  brought. 

Question:  (1)  Did  the  Revenue  Act  of  1916  remove  the  bar 
of  Sections  3227  and  3228,  Revised  Statutes,  so  as  to  give  the  plain- 
tiff a  right  of  action  against  the  collectors  where  tax  was  illegally 
exacted  which  otherwise  would  have  been  barred  by  said  sections  ? 

(2)  Was  the  defense  of  res  adjudicata  available  to  the 
defendant  ? 

Decision:  (1)  The  Act  of  1916,  permitting  a  taxpayer  to  file 
a  claim  for  refund  of  taxes  collected  under  the  1909  and  1913  Acts, 
notwithstanding  Sec.  3228,  R.  S.,  permits  a  suit  to  recover  taxes 
unlawfully  collected  where  the  claim  for  refund  made  thereunder 
was  erroneously  rejected  by  the  collector.  The  cause  of  action  for 
such  taxes  accrues  at  the  time  of  such  rejection  within  Sec.  3227, 
R.  S.,  requiring  suit  to  be  brought  within  two  years  after  the  cause 
of  action  accrues.  The  subject  matter  of  R.  S.  3228  and  the  Act  of 
1916  lifting  the  two  year  limitation  thereunder  was  refunding 
claims  made  to  the  Commissioner,  and  not  suits.    The  Act  of  1916 


966  545  U.  S.  TAX  CASES 

made  no  change  with  regard  to  the  limitation  of  suits  provided  for 
in  R.  S.  3227. 

(2)  The  United  States  having  given,  by  the  Act  of  1916,  the 
plaintiff  statutory  authority  to  bring  this  suit,  it  thereby  signified 
that  it  did  not  stand  on  any  previous  litigation  between  it  and  the 
taxpayer  to  create  the  defense  of  res  adjudicata. 

PUMMILLI  V.  RIORDAN,  COLLECTOR 

(U.  S.  District  Court  W.  D.  New  York,  June  24,  1921) 

(275  Fed.  846) 

Record :  Section  35,  National  Prohibition  Act.  Bill  to  enjoin 
collection  of  taxes  and  penalties.  Motion  for  injunction  denied. 
Motion  for  rehearing  denied,  and  all  injunctions  vacated. 

Facts:  The  defendant  collector  assessed  taxes  and  penalties 
against  the  plaintiff  under  Section  35  of  the  National  Prohibition 
Act,  in  the  amount  of  $533.76.  The  plaintiff  sought  to  restrain  the 
assessment  on  the  ground  that  it  was  for  violation  of  a  criminal 
statute,  and  not  for  violation  of  any  revenue  laws,  and  accordingly 
was  not  lawful  and  not  legally  collectible. 

Question:  May  the  assessment  and  collection  of  taxes  and 
penalties  under  Section  35,  National  Prohibition  Act,  be  restrained  ? 

Decision :  As  the  provisions  of  the  Internal  Revenue  Act  for 
collection  apply  to  the  taxes  and  penalty  under  the  National  Pro- 
hibition Act  for  illegal  manufacture  and  sale,  collection  thereunder 
cannot  be  restrained ;  there  being  adequate  remedy  by  proceedings 
to  obtain  a  refund  and  subsequent  suit,  if  necessary,  for  recovery. 

RAND  V.  UNITED  STATES 
(U.  S.  Supreme  Court,  April  21,  1919) 
(249  U.  S.  503) 
Record:    Inheritance  Tax  Act  of  June  13,  1898,  R.  S.  Sec- 
tions 3226  and  3228,  and  Acts  of  June  27, 1902,  and  July  27,  1912. 
Suit  to  recover  inheritance  tax  paid.    Appeal  from  decision  of  the 
Court  of  Claims  dismissing  the  suit.    Judgment  affirmed. 

Facts:  Under  the  will  of  one  Edmund  Dwight,  who  died  in 
1900,  a  trust  fund  was  created  for  the  benefit  of  Jennie  Rand.    In 


545  U.  S.  TAX  CASES  967 

1900  the  executrix  of  the  estate  made  a  return  of  the  legacies  in 
her  charge  and  included  therein  the  legacy  to  Mrs.  Rand.  Appar- 
ently without  any  demand  from  the  collector  or  other  officer  the 
executrix  paid  a  tax  upon  this  legacy  amounting  to  $3,026.69.  Un- 
der authority  of  the  Act  of  July  27,  1912,  the  New  England  Trust 
Co.,  the  trustee  under  the  will  of  D wight,  by  its  attorney,  filed  on 
December  24,  1913,  with  the  Commissioner  a  claim  for  refund  of 
the  tax.  And  on  December  30,  1913,  attorneys  acting  for  the  ad- 
ministrator de  bonis  non  of  Dwight  also  filed  a  claim  for  refund. 
These  claims  were  rejected.  It  was  not  shown  that  Mrs.  Rand,  the 
plaintiff  in  this  suit,  or  any  person  acting  for  her,  had  filed  any 
claim. 

Questions:  (1)  Is  the  plaintiff's  action  barred  by  R.  S.  Sec- 
tions 3226  and  3228  ? 

(2)  Is  recovery  of  the  tax  barred  by  reason  of  the  fact  that 
it  was  paid  voluntarily  ? 

(3)  Does  the  claim  filed  by  the  trust  company  or  the  claim 
filed  on  behalf  of  the  administrator  de  bonis  non  satisfy  the  re- 
quirements of  the  Act  of  July  27,  1912,  that  repayment  shall  be 
made  to  "such  claimants  as  have  presented  or  shall  hereafter  so 
present  their  claims"  in  a  suit  for  recovery  of  the  tax  brought  by 
the  cestui  que  trust? 

Decision:  (1)  " There  is  no  question  that  the  cited  sections " 
(section  3  of  the  Act  of  1902  and  section  2  of  the  Act  of  1912)  "re- 
move the  bar  of  sections  3226  and  3228  if  appellant  has  met  their 
requirements  and  presented  to  the  Commissioner  of  Internal  Reve- 
nue a  claim  for  the  refund  of  the  tax." 

(2)  "Nor  is  the  fact  that  the  tax  was  voluntarily  paid,  that  is, 
without  protest,  an  impediment  to  the  application  of  the  Act  of 
1912." 

(3)  The  court  denied  the  contention  of  the  counsel  for  the 
plaintiff  that  the  claims  made  by  the  trustee  and  the  personal  repre- 
sentative of  the  deceased  should  be  ascribed  to  Mrs.  Rand  and  also 
held  that  the  inutility  of  filing  a  claim  by  her,  based  on  the  fact 
that  she  knew  the  precise  facts  of  the  claims  that  had  been  made, 
and  that  claims  of  the  class  to  which  hers  belonged  had  been  uni- 


968  545  U.  S.  TAX  CASES 

formly  rejected  and  that  another  claim  in  her  name  would  be  a 
"useless  ceremony,"  could  not  justify  her  failure  to  file  a  claim  in 
her  name.  **It"  (the  statute  of  1912)  "had  its  purpose  and  is  not 
satisfied  by  representative  or  negative  action ;  it  requires  a  positive 
and  individual  assertion  or  claim.  •  *  *  It  says  to  the  tax- 
payer :  Make  a  claim  for  the  tax  you  have  paid,  show  its  illegality 
and  it  will  be  repaid  to  you.  We  can  not  relax  its  requirements— 
certainly  not  on  the  assumption  that  they  might  have  been  useless 
if  complied  with." 

RAYMER  V.  TRBFRY 

(Supreme  Court,  Massachusetts,  September  16,  1921) 
(132  N.  E.  190) 

Record :  Massachusetts  St.  1919,  C.  324,  and  44th  Amendment 
to  Massachusetts  Constitution.  Proceeding  for  abatement  of  a  tax. 
Motion  for  amendment  denied  and  judgment  ordered  for  defendant. 

Facts:  Respondent,  as  Commissioner  of  corporations  and 
taxation,  assessed  against  plaintiff's  taxable  income,  consisting  of 
his  salary  as  associate  professor  in  Harvard  University,  a  tax 
of  one  and  one-half  per  cent,  assessed  in  accordance  with  St.  1916, 
C.  269,  Sec.  5b,  which  was  conceded  to  have  been  valid;  but  a 
further  tax  of  1  per  cent  amounting  to  $10.99,  levied  under  St.  1919, 
C.  324,  which  provided  that,  in  addition  to  other  income  taxes  there- 
tofore required,  "an  additional  tax  of  1  per  cent  on  all  income 
received  during  the  calendar  years  1918  and  1919  taxable  under  the 
provisions  of  par.  (b)  of  Section  five  of  said  chapter"  should  be 
levied,  was  the  subject  of  this  action.  The  44th  Amendment  to  the 
Massachusetts  Constitution  provided  that  income  tax  "may  be  at 
different  rates  upon  income  derived  from  different  classes  of  prop- 
erty, but  shall  be  levied  at  a  uniform  rate  throughout  the  com- 
monwealth upon  incomes  derived  from  the  same  class  of  property. 
The  general  courts  may  tax  income  not  derived  from  property  at  a 
lower  rate  than  income  derived  from  property,  and  may  grant 
reasonable  exemptions  and  abatements. ' ' 

Question:  Was  the  income  on  which  the  plaintiff  was  taxed 
"not  derived  from  property"  as  those  words  are  used  in  the  44th 
Amendment  to  the  Constitution  ? 


545  U.  S.  TAX  CASES  969 

Decision:  "The  words  of  this  amendment,  like  all  constitu- 
tional provisions  are  to  be  interpreted  as  expressing  comprehensive 
principles  of  government.  They  are  not  to  be  given  a  narrow  or 
constricted  signification.  They  have  meaning  in  accordance  with 
the  common  understanding  at  the  time.  They  are  to  be  construed  in 
such  way  as  to  carry  into  effect  what  seems  to  be  the  reasonable 
purpose  of  the  people  in  adopting  them.  •  •  *  The  Constitution 
and  its  amendments  are  also  to  be  construed  as  an  harmonious  whole. 
Words  occurring  in  different  places  in  the  Constitution  and  its 
amendments  ordinarily  should  be  given  the  same  meaning  unless 
manifestly  used  in  different  senses.  It  has  already  been  held  that 
this  amendment  is  to  be  interpreted  so  as  to  include  every  item  of 
wealth  accruing  to  the  taxpayer  during  a  stated  period  which  can  be 
fairly  regarded  as  income.  *  *  *  The  words  '  income  not  derived 
from  property'  and  'income  derived  from  property'  in  the  Forty- 
fourth  Amendment  are  to  be  interpreted  in  the  light  of  these  princi- 
ples. The  word  'property'  occurs  in  several  places  in  the  Constitu- 
tion and  its  amendments  both  of  this  commonwealth  and  of  the 
United  States.  Property  is  a  word  of  large  importance.  It  has 
been  interpreted  as  including  the  right  to  make  contracts  for  labor 
and  for  personal  service.  *  *  •  It  is  not  open  to  question  that  con- 
tracts for  labor  and  service  are  property  within  the  meaning  of 
that  word  in  both  the  federal  and  state  constitutions  and  as  such 
they  are  entitled  to  the  protection  of  the  numerous  guaranties 
thereby  afforded.  It  would  be  a  strained  and  unnatural  construc- 
tion to  hold  that  that  which  was  'property'  for  the  purposes  of  the 
protection  afforded  by  the  Constitution  was  not  'property'  for  the 
purposes  of  the  taxation  of  income  '  derived  from  property '  author- 
ized by  an  amendment  to  this  same  instrument.  There  are  other 
classes  of  income  which  may  be  thought  to  be  'not  derived  from 
property.'  Hence  these  words  in  the  amendment  may  be  given 
force  and  effect  if  and  when  the  general  court  shall  make  such 
classification  for  purposes  of  taxation.  The  decision  of  this  point 
is  decisive  against  the  complainant  and  it  becomes  unnecessary  to 
consider  the  other  contentions  made  in  his  behalf. ' ' 


970  545  U.  S.  TAX  CASES 

ROCKEFELLER  v.  UNITED  STATES 

NEW  YORK  TRUST  COMPANY,  ETC.,  EXECUTORS  OF 

HARKNESS  v.  EDWARDS,  COLLECTOR 

(U.  S.  Supreme  Court,  Nov.  21,  1921) 
(Not  yet  reported) 

Record:  Act  of  October  3,  1913.  Two  wi'its  of  error  to  the 
District  Court  for  the  Southern  District  of  New  York  to  review 
judgments  sustaining  assessments  of  income  taxes.  Affirmed.  See 
same  case  below,  274  Fed.  952,  ante  367. 

Facts:  The  Prairie  Oil  &  Gas  Company,  a  Kansas  corpora- 
tion, caused  a  new  corporation  to  be  organized  in  the  winter  of 
1914-1915  under  the  laws  of  Kansas,  to  be  known  as  the  Prairie 
Pipe  Line  Company,  to  which  all  the  pipe  line  property  of  the 
Prairie  Oil  &  Gas  Company  was  transferred  in  consideration  of  the 
issue  and  delivery  of  the  entire  capital  stock  of  the  new  company, 
to  be  distributed  to  the  stockholders  of  the  Prairie  Oil  &  Gas  Com- 
pany. In  the  case  of  the  Ohio  Oil  Company,  an  Ohio  corporation, 
there  was  a  similar  transaction,  except  that  under  the  contract  be- 
tween it  and  the  Illinois  Pipe  Line  Company,  the  new  Ohio  cor- 
poration organized  by  it,  the  shares  of  stock  of  the  new  company 
were  issued  direct  to  the  old  company.  However,  the  directors  of 
the  old  company  in  the  same  resolution  which  accepted  the  contract 
declared  a  dividend  of  these  shares  to  its  stockholders.  Messrs. 
Rockefeller  and  Harkness  were  holders  of  large  amounts  of  stock 
of  both  the  Prairie  and  Ohio  Oil  companies,  and  in  the  distribution 
each  received  an  amount  of  stock  in  each  of  the  pipe  line  companies 
proportionate  to  his  holdings  in  the  oil  companies.  In  the  case  of 
both  oil  companies  the  properties  conveyed  represented  a  surplus 
above  the  par  value  of  the  oil  companies '  stock,  and  the  conveyances, 
therefore,  left  the  said  companies'  capital  unimpaired  and  required 
no  reduction  of  their  authorized  issues.  Income  tax  assessments 
for  the  year  1915  were  imposed  upon  Messrs.  Rockefeller  and  Hark- 
ness, based  upon  the  value  of  the  stock  thus  received  as  dividends. 

Question :  Did  the  distribution  of  the  stocks  of  the  pipe  line 
companies  among  the  stockholders  of  the  oil  companies  constitute 


545  U.  S.  TAX  CASES  971 

dividends  under  the  meaning  of  the  Act  of  1913,  and  income  within 
the  meaning  of  the  Sixteenth  Amendment  ? 

Decision:  The  facts  are  in  all  essentials  undistinguishable 
from  those  presented  in  United  States  v.  Phellis.  The  new  stock 
represented  assets  of  the  oil  companies  standing  in  place  of  the  pipe 
line  properties  that  before  had  constituted  positions  of  their  surplus 
assets,  and  it  was  capable  of  division  among  stockholders  as  the 
pipe  line  properties  were  not.  '  *  The  distribution,  whatever  its  effect 
upon  the  aggregate  interests  of  the  mass  of  stockholders,  constituted 
in  the  case  of  each  individual  a  gain  in  the  form  of  actual  exchange- 
able assets  transferred  to  him  from  the  oil  company  for  his  separate 
use,  in  partial  realization  of  his  former  indivisible  and  contingent 
interest  in  the  corporate  surplus.  It  was  in  substance  and  effect, 
not  merely  in  form,  a  dividend  of  profits  by  the  corporation,  and 
individual  income  to  the  stockholder. 

"The  opinion  just  delivered  in  United  States  v.  Phellis  suffi- 
ciently indicates  the  grounds  of  our  conclusion  that  the  judgment 
in  each  of  the  present  cases  must  be  affirmed. ' ' 

SAGE  et  al.,  EXECUTORS  v.  UNITED  STATES 

(U.  S.  Supreme  Court,  May  19,  1919) 

(250  U.  S.  33) 

Record:  Act  of  June  13,  ]898.  Act  of  June  27,  1902.  Act 
of  July  27,  1912.  Action  to  recover  taxes  paid.  Appeal  from  deci- 
sion of  Court  of  Claims  dismissing  the  petition  on  demurrer.  53  Ct. 
Cls.  628.    Judgment  reversed. 

Facts :  The  testator  died  on  June  23,  1902,  so  that  the  debts 
of  the  estate  were  not  ascertained  and,  as  decided  in  McCoach  v. 
Pratt,  236  U.  S.  562,  the  legacies  were  not  "absolutely  vested  in 
possession  or  enjoyment"  before  July  1,  1902;  and  therefore  by  the 
terms  of  the  Act  of  1902  were  not  subject  to  the  tax  under  the  Act 
of  1898.  A  tax  of  $63,940.88  was  collected,  however,  in  June,  1903. 
A  claim  for  refund  was  filed  on  August  24,  1903,  but  was  denied 
in  the  following  month.  Two  years  later  petitioners  sued  the  col- 
lector, and  in  1912  got  judgment  for  $30,275.49,  with  interest  and 
costs,  which  was  satisfied  by  the  United  States.  This  suit  for  the 
unrepaid  residue  was  begun  on  January  23,  1917. 


972  545  U.  S.  TAX  CASES 

Questions:  (1)  Was  the  former  judgment  a  bar  to  this 
action  ? 

(2)  Was  the  filing  of  a  new  claim  under  the  Act  of  July  27, 
1912,  a  condition  precedent  for  the  recovery  of  the  amount  here 
sued  for  ? 

(3)  Was  this  action  barred  by  the  statute  of  limitations? 

Decision:  (1)  "The  former  judgment  is  not  a  bar.  *  •  * 
No  one  could  contend  that  technically  a  judgment  of  a  District 
Court  in  a  suit  against  a  collector  was  a  judgment  against  or  in 
favor  of  the  United  States.  *  ♦  *  The  suit  is  personal  and  its 
incidents,  such  as  the  nature  of  the  defenses  open  and  the  allow- 
ance of  interest,  are  different. ' ' 

(2)  "The  claimants  presented  their  claim,  and  so  had  com- 
plied with  the  letter  of  the  act.  But  it  is  said  that  they  filed  it 
simply  as  a  prerequisite  to  their  suit  against  the  collector  and  that 
its  effect  was  extinguished  by  the  judgment  in  that  suit.  This  argu- 
ment reads  into  the  words  of  the  statute  what  is  not  there  and  reads 
what  was  there  out  of  the  claim.  *  *  *  It  did  not  have  to  be 
a  claim  under  the  act  as  the  statute  in  terms  contemplated  that  it 
might  have  been  presented  before  the  statute  was  passed.  But  if 
the  presenting  was  sufficient  before  the  suit  was  brought  it  is  suffi- 
cient now.  The  statute  of  course  does  not  confine  its  act  of  justice 
to  unrejected  claims." 

(3)  "The  Act  of  1912  applied  in  terms  to  'all  claims  for  the 
refunding  of  any  internal  tax  alleged  to  have  been  erroneously  or 
illegally  assessed  or  collected'  under  the  above  mentioned  Sec.  29, 
The  only  condition  was  that  it  should  have  been  presented  not  later 
than  January  1,  1914.  Until  that  time  no  statute  of  limitations 
could  begin  to  run.  After  the  act  was  passed  an  application  was 
made  on  September  7,  1916,  to  the  Secretary  of  the  Treasury  for 
repayment  of  the  residue  of  the  erroneously  collected  tax.  It  was 
rejected  on  October  30, 1916,  on  the  mistaken  ground  that  the  judg- 
ment against  the  collector  finished  the  matter.  This  suit  was 
brought  on  January  23,  1917,  and  so  was  within  the  six  years  al- 
lowed by  Rev.  Stats.  1069,  for  suit  in  the  Court  of  Claims. '  * 


545  U.  S.  TAX  CASES  973 

SCHAFER  V.  CRAFT,  COLLECTOR 

(U.  S.  District  Court,  W.  D.  Kentucky,  April  21,  1906) 
(144  Fed.  907) 

Record :  Oleomargarine  Act  of  August  2,  1886.  Action  to  re- 
cover special  tax  and  penalty  paid.  Judgment  for  plaintiff  as  to 
the  penalty  only. 

Facts:  A  special  tax  of  $48  was  assessed  against  plaintiff  as 
a  retail  dealer  in  oleomargarine.  A  penalty  of  50  per  cent,  for  non- 
payment of  the  special  tax  when  due,  was  also  assessed.  Both  the 
tax  and  the  penalty  were  paid  under  compulsion,  and  this  action 
was  brought  for  their  recovery.  Upon  the  trial,  the  court  found 
that  the  plaintiff  was  in  fact  liable  for  the  special  tax. 

Questions:  (1)  If  the  tax  paid  was  lawfully  due  could  it  be 
recovered  simply  because,  as  the  plaintiff  contended,  the  Commis- 
sioner had  no  authority  under  the  Oleomargarine  Act  to  make  the 
*  *  assessment  ? ' ' 

(2)  "Was  the  penalty  recoverable? 

Decision :  (1)  "We  might  not  in  any  event  agree  to  this  view, 
but  have  concluded  that  it  is  wholly  unnecessary  to  pass  upon  the 
question  because  upon  the  most  familiar  principles  one  cannot  by 
suit  recover  any  taxes  once  paid,  which  in  fact  were  due  even  though 
the  exact  manner  of  their  collection  was  not  authorized.  And,  in- 
deed, one  must  first  pay  taxes  which  are  due  in  fact  before  he  can 
recover  any  that  were  exacted  which  were  not  due." 

(2)  "But  as  to  the  $24  collected  as  a  50  per  cent  penalty  dif- 
ferent questions  arise.  *  *  *  Certainly  there  is  no  provision  in 
the  oleomargarine  legislation  itself,  which  in  terms  authorizes  an 
assessment  by  the  Commissioner  of  such  or  indeed  of  any  penalty 
for  nonpayment  of  a  special  tax.  *  *  *  The  court  is  constrained 
to  hold  that  section  3176,  Rev.  St.,  not  being  included  in  the  sec- 
tions expressly  made  parts  of  the  Oleomargarine  Act  is  excluded; 
and  consequently  there  was  no  warrant  of  law  for  assessing  that 
50  per  cent  penalty  in  this  instance,  and  for  that  reason  has  con- 
cluded that  the  plaintiff  is  entitled  to  recover  from  the  defendant 
$24  with  interest  thereon  from  December  17,  1903,  until  paid  and 
costs. ' ' 


974  545  U.  S.  TAX  CASES 

SCHUSTER  &  COMPANY,  INC.  v.  WILLIAMS,  COLLECTOR 

(U.  S.  Circuit  Court  of  Appeals,  Seventh  Cir.,  January,  1922) 
(Not  yet  reported) 

Record :  Revenue  Act  of  1918.  Action  to  recover  taxes  paid 
under  protest.  On  writ  of  error  to  the  U.  S.  District  Court  for  the 
Western  District  of  Wisconsin,  which  rendered  judgment  for  the 
defendant.    Judgment  affirmed. 

Facts :  The  plaintiff,  a  Wisconsin  corporation,  made  its  Fed- 
eral income  tax  return  for  the  calendar  year  1918  on  the  accrual 
basis  and  one  of  the  deductions  was  the  income  tax  of  the  State 
of  Wisconsin  at  the  rate  in  effect  December  31,  1918.  The  Wiscon- 
sin legislature  passed  a  "Soldiers'  Bonus"  Act  on  July  30,  1919, 
which  provided  for  the  raising  of  the  entire  bonus  by  one  tax  levy, 
of  one  mill  on  all  assessed  property  for  the  year  1919,  and  a  surtax 
over  the  normal  tax  upon  incomes  of  corporations  on  the  basis  of 
Wisconsin  income  tax  return  for  the  calendar  year  1918.  The  Act 
by  its  terms  did  not  become  effective  until  ratification  by  popular 
vote  which  occurred  October  10,  1919.  Upon  the  favorable  vote  on 
the  Act,  the  plaintiff  filed  an  amended  Federal  Income  tax  return 
for  the  year  1918  wherein  its  Soldiers'  Bonus  Tax  payable  on  the 
basis  of  the  Wisconsin  income  tax  return  was  additionally  included 
in  the  deduction  of  "reserve  for  taxes." 

Question:  (1)  Was  the  Wisconsin  Soldiers'  Bonus  Tax  of 
1919  accrued  in  1918  so  as  to  be  deductible  from  the  gross  corporate 
income  for  1918  ? 

Decision:  (1)  "There  is  no  necessary  relation  between  the 
basis  for  the  levy,  and  the  time  of  the  accrual  of  the  tax.  Whether 
computed  on  a  property  assessment  or  a  state  income  tax  return, 
the  tax  did  not  accrue  until  it  became  a  liability  to  the  taxpayer. 
Since  the  Act  creating  the  tax  was  not  passed  until  after  the  Fed- 
eral income  tax  year  of  1918,  this  Soldiers'  Bonus  tax  can  in  no 
sense  be  deemed  to  have  accrued  during  the  calendar  year  prior  to 
that  of  its  passage." 


545  U.  S.  TAX  CASES  975 

SECURITY  SAVINGS  &  COMMERCIAL  BANK 
V.  DISTRICT  OF  COLUMBIA 

(Court  of  Appeals  of  District  of  Columbia,  March  6,  1922) 
(279  Fed.  185) 

Record :  Act  of  July  1,  1902,  Section  6,  par.  7,  as  amended  by- 
Act  of  April  28,  1904.  Action  to  recover  a  tax  paid  under  protest. 
From  a  judgment  dismissing  the  cause,  plaintiff  appeals.    Affirmed. 

Facts:  The  appellant  is  a  savings  bank,  incorporated  under 
the  laws  of  West  Virginia,  and  doing  business  in  the  District  of 
Columbia.  Pursuant  to  the  act  named  above  a  tax  was  levied  upon 
the  gross  earnings  of  the  bank.  These  earnings  included  $16,517,33, 
interest  derived  from  liberty  bonds  and  other  United  States  secur- 
ities exempt  from  tax.  The  bank  claiming  the  tax  was  void  insti- 
tuted this  suit. 

Question :     Is  the  tax  invalid  as  a  tax  on  property  ? 

Decision:  The  act  in  question  imposes  upon  the  corporation 
the  duty  of  paying  the  tax,  and  provides  that  the  amount  shall  be 
determined  by  the  sum  of  gross  earnings.  "If  there  are  no  earn- 
ings, there  will  be  no  tax,  no  matter  how  much  property  the  corpo- 
ration may  own,  and  there  will  be  no  earnings  unless  business  is 
done.  The  amount  of  the  tax  fluctuates  with  the  quantity  of  busi- 
ness transacted,  and  is  measured  by  it.  This  indicates  an  intention 
to  tax  the  doing  of  business,  and  not  the  property;  hence  the  tax 
is  a  franchise  tax." 

SHWAB  V.  DOYLE,  COLLECTOR 
(U.  S.  Supreme  Court,  May  1,  1922) 
(Not  yet  reported) 
Record:     Revenue  Act  of  1916.    Action  to  recover  an  estate 
tax  paid  under  protest.    Error  to  the  U.  S.  Circuit  Court  of  Ap- 
peals, Sixth  Circuit,  which  affirmed  a  judgment  of  the  U.  S.  District 
Court,  W.  D.  Michigan,  S.  D.,  in  favor  of  the  defendant.    269  Fed. 
321,  ante  451.    Judgment  reversed. 

Facts:  On  April  21,  1915,  a  decedent  executed  a  trust  deed 
conveying  certain  securities.  She  died  on  September  16,  1916, 
seven  days  after  the  passage  of  the  Estate  Tax  Act,  possessed  of 


976  545  U.  S.  TAX  CASES 

an  estate  of  $800,000.  Under  the  assumption  that  the  provision 
in  the  Act  relating  to  transfers  in  contemplation  of  death  made 
within  two  years  prior  to  death,  without  consideration,  was  appli- 
cable to  the  deed  in  question,  a  tax  was  assessed  and  exacted  from 
the  plaintiff  in  error,  as  executor  of  the  estate,  in  the  sum  of 
$56,548.41.  This  tax  was  paid  under  protest,  and  this  action  com- 
menced for  its  recovery. 

Question:    Was  the  provision  in  the  statute  taxing  transfers 
made  in  contemplation  of  death  retrospective  in  its  operation  ? 

Decision :  * '  The  initial  admonition  is  that  laws  are  not  to  be 
considered  as  applying  to  cases  which  arose  before  their  passage 
unless  that  intention  be  clearly  declared.  •  *  *  There  is  abso- 
lute prohibition  against  them  when  their  purpose  is  punitive ;  they 
then  being  denominated  ex  post  facto  laws.  It  is  the  sense  of  the 
situation  that  that  which  impels  prohibition  in  such  case  exacts 
clearness  of  declaration  when  burdens  are  imposed  upon  completed 
and  remote  transactions,  or  consequences  given  to  them  of  which 
there  could  have  been  no  foresight  or  contemplation  when  they 
were  designed  and  consummated.  The  Act  of  September  8,  1916, 
is  within  the  condemnation.  There  is  certainly  in  it  no  declaration 
of  retroactivity,  'clear,  strong,  and  imperative,'  which  is  the  con- 
dition expressed  in  United  States  v.  Heth  (3  Cranch  398,  415 ;  also 
United  States  v.  Burr,  159  U.  S.  78,  82-83).  If  the  absence  of  such 
determining  declaration  leaves  to  the  statute  a  double  sense,  it  is 
the  command  of  the  cases  that  that  which  rejects  retroactive 
operation  must  be  selected.  *  •  *  If  Congress,  however,  had 
the  purpose  assigned  by  the  Commissioner,  it  should  have  declared 
it ;  when  it  had  that  purpose  it  did  declare  it.  In  the  Revenue  Act 
of  1918  it  re-enacted  Section  202  of  the  Act  of  September  8,  1916, 
and  provided  that  the  transfer  or  trust  should  be  taxed  whether 
'made  or  created  before  or  after  the  passage  of  the  Act.  And  we 
can  not  accept  the  explanation  that  this  was  an  elucidation  of  the 
Act  of  1916,  and  not  an  addition  to  it,  as  averred  by  defendant,  but 
regard  the  Act  of  1918  rather  as  a  declaration  of  a  new  purpose; 
not  the  explanation  of  an  old  one.  *  •  ♦  There  are  adverse 
considerations  and  the  Government  has  urged  them  all.  *  •  • 
We  need  only  say  that  we  have  given  careful  consideration  to  the 


545  U.  S.  TAX  CASES  977 

opposing  argument  and  cases,  and  a  careful  study  of  the  text  of 
the  Act  of  Congress,  and  have  resolved  that  it  should  be  not  con- 
strued to  apply  to  transactions  completed  when  the  Act  became  a 
law." 

SLOCUM  V.  EDWARDS,  COLLECTOR 

(U.  S.  District  Court,  S.  D.  New  York,  June  20,  1922) 
(Not  yet  reported) 

Record:  Revenue  Act  of  1918.  Action  to  recover  Federal 
estate  taxes  alleged  to  have  been  erroneously  assessed  and  collected. 
Judgment  for  plaintiff. 

Facts :  The  plaintiff  filed  a  Federal  estate  tax  return  showing 
a  net  estate  of  $8,568,079.55,  upon  which  the  total  tax  due  would 
be  ,$1,406,977.50.  The  Commissioner  of  Internal  Revenue  revised 
this  tax  by  deducting  from  the  bequests  for  charitable  purposes, 
which  were  deductible  from  gross  estate  under  Section  403(a)  (3) 
of  the  Revenue  Act  of  1918,  the  amount  of  state  transfer  taxes,  viz., 
$5,741.83,  payable  under  clause  6  of  the  will  from  the  residuary 
estate  which  went  to  charity.  He  also  deducted  from  the  residuary 
estate  going  to  charity  the  Federal  estate  tax.  This  lessened  the 
amount  of  the  charitable  bequests  which  are  made  deductible  in 
computing  the  net  estate  subject  to  the  estate  tax  and  increase  the 
tax  accordingly.  The  sum  of  $413,629.62  and  interest  is  the  amount 
of  overpayment  now  sought  to  be  recovered. 

Questions:  (1)  Should  the  deduction  of  "the  amount  of  all 
bequests,  legacies,  devises  or  gifts ' '  provided  for  in  the  statute  be 
reduced  by  the  amount  of  the  Federal  estate  tax  thereon  ? 

(2)  Should  the  deduction  of  "the  amount  of  all  bequests, 
legacies,  devises  or  gifts"  provided  for  in  the  statute  be  reduced 
by  the  amount  of  the  state  legacy  tax  payable  out  of  the  general 
estate  under  clause  6  of  the  will  ? 

Decision:  (1)  "The  charitable  recipients  of  the  testator's 
bounty  ultimately  receive  only  a  balance  constituted  after  the 
Government  has  taken  out  the  estate  tax  levied  as  an  excise  tax 
upon  the  privilege  granted  to  the  testator  of  transmitting  his  prop- 
erty at  death.    In  the  case  of  an  estate  bequeathed  to  a  single  indi- 


978  545  U.  S.  TAX  CASES 

vidual  the  estate  tax  might  have  been  computed  upon  what  he 
would  receive  after  the  estate  had  suffered  diminution  by  the  tax 
itself  but  such  has  never  been  the  practice,  and  the  uniform  theory 
has  been  that  the  estate  passing  was  to  be  treated  without  regard 
to  the  incidence  of  the  tax  itself.  I  see  no  reason  why  a  different 
rule  should  be  adopted  in  dealing  with  the  words  'the  amount  of 
all  bequests,  legacies,  devises  or  gifts'  even  when  applied  to  a  re- 
sidue to  charity.  In  the  first  case  if  the  taxes  had  been  computed 
upon  the  amount  actually  passing  after  deducting  the  tax  millions 
of  dollars  would  have  been  saved  to  taxpayers.  It  does  not  seem 
consistent  to  look  at  the  matter  in  a  different  way  in  dealing  with 
the  present  case,  particularly  in  view  of  the  liberal  legislation  en- 
acted in  aid  of  charitable  gifts." 

(2)  "The  state  legacy  tax  amounting  to  $5,741.83  payable  out 
of  the  general  estate  under  clause  6  of  the  will  would  not,  under 
the  New  York  decisions  be  deductible  from  the  residuary  estate  in 
appraising  the  value  of  that  estate  for  the  purpose  of  transfer  taxes. 
Matter  of  Swift,  137  N.  Y.  77.  The  Government  in  this  case  wishes 
to  increase  the  net  taxable  estate  by  reducing  the  deductible  resid- 
uary bequests  to  charities  which  have  to  pay  this  $5,741.83  to  the 
extent  of  that  sum.  In  my  opinion  the  decision  of  the  New  York 
Courts  in  construing  the  transfer  tax  act  should  not  control  the 
present  situation.  If  the  New  York  Courts  had  reached  any  other 
decision  than  the  one  they  did  and  had  held  that  a  direction  to  pay 
a  tax  upon  a  legacy  to  A  out  of  the  general  estate  lessened  the  gen- 
eral estate  for  purposes  of  taxation  by  the  amount  of  the  tax  on 
A's  legacy,  the  effect  would  have  been  to  free  tlie  estate  from  any 
tax  on  the  amount  saved  to  A  by  the  direction  that  the  tax  on  his 
legacy  should  be  paid  from  another  fund.  Such  a  result  was  un- 
reasonable, and  the  New  York  Court  properly  held  was  not  within 
any  justifiable  construction  of  the  statute.  In  the  present  case, 
however,  there  is  a  direction  under  clause  6  of  the  will  that  taxes 
on  legacies  to  certain  individuals  should  be  paid  out  of  the  general 
estate.  It  may  well  be  that  this  direction  should  not  affect  the 
amount  or  method  of  ascertaining  any  legacy  tax,  but  where  the 
deduction  allowed  for  charitable  bequests  in  computing  the  net 
taxable  estate  is  limited  to  the  amount  of  such  bequests  a  specific 


545  U.  S.  TAX  CASES  979 

charge  by  the  terms  of  the  will  upon  a  portion  of  the  estate  be- 
queathed to  charity  alters  the  plain  testamentary  disposition  of 
the  testator's  property  to  that  extent  and  limits  the  amount  of  the 
charitable  bequests  pro  tanto.  It  will  be  said  that  if  the  subtraction 
of  the  amount  of  all  bequests  to  charity  is  to  take  into  account 
legacy  taxes  payable  out  of  such  bequests  by  the  terms  of  the  wiU, 
it  should  take  into  account  the  Federal  estate  tax  which  is  a  legal 
charge  upon  the  estate.  I  do  not  think  the  cases  are  parallel. 
The  testator  by  her  own  direction  limited  the  amount  which  the 
residuary  legatees  would  receive  by  the  legacy  taxes.  On  the  other 
hand,  the  uniform  practice  has  been  to  disregard  the  Federal  estate 
tax  itself  in  determining  the  net  estate.  It  is  reasonable  to  apply 
the  same  rule  in  determining  what  is  the  residue  which  the  testa- 
trix gave  to  charity  for  the  purpose  of  claiming  the  statutory  de- 
duction. *  *  *  The  motion  for  judgment  dismissing  the 
amended  complaint  is  denied,  and  judgment  is  directed  for  the 
plaintiffs,  with  interest,  except  as  to  the  tax  on  the  sum  of  $5,741.83, 
which  sum  should  be  deducted  from  the  residue  passing  to  charity 
and  thus  added  to  the  net  estate  for  purposes  of  taxation. ' ' 

SMIETANKA,  COLLECTOR  v.  FIRST  TRUST  &  SAVINGS 
BANK,  TRUSTEE 

(U.  S.  Supreme  Court,  Feb.  27,  1922) 
(Not  yet  reported) 

Record :  Act  of  October  3,  1913.  On  writ  of  certiorari  to  the 
Circuit  Court  of  Appeals  for  the  Seventh  Circuit  to  review  a  judg- 
ment which  reversed  a  judgment  of  the  District  Court  in  favor  of 
a  collector  of  internal  revenue  in  an  action  to  recover  back  a  tax 
paid  under  protest.  Affirmed.  See  same  case  below,  268  Fed.  230, 
ante  215. 

Facts:  The  respondent  was  compelled  to  pay  a  tax  for  the 
years  1913,  1914  and  1915  on  the  income  of  a  trust  estate  which 
was  held  and  accumulated  for  the  benefit  of  unborn  and  unascer- 
tained persons. 

Question:  Is  income  held  and  accumulated  by  a  trustee  for 
the  benefit  of  unborn  and  unascertained  persons  taxable  under  the 
Act  of  October  3,  1913  ? 


980  545  U.  S.  TAX  CASES 

Decision:  "No  language  in  the  Act  included  a  tax  on  income 
received  by  a  trustee  by  him  to  be  accumulated  for  unborn  or  un- 
ascertained beneficiaries.  There  was  indicated  in  the  taxing  Para- 
graph A  the  congressional  intention  to  tax  citizens  everywhere,  and 
noncitizens,  resident  in  the  United  States,  including  persons,  nat- 
ural and  corporate,  on  income  from  every  source  less  allowed  deduc- 
tions. But  nowhere  were  words  used  which  can  be  stretched  to 
include  unborn  beneficiaries  for  whom  income  may  be  accumulat- 
ing. It  may  be  that  Congress  had  a  general  intention  to  tax  all 
incomes  whether  for  the  benefit  of  persons  living  or  unborn,  but  a 
general  intention  of  this  kind  must  be  carried  into  language  which 
can  be  reasonably  construed  to  effect  it.  Otherwise  the  intention 
can  not  be  enforced  by  the  courts.  The  provisions  of  such  acts  are 
not  to  be  extended  by  implication." 

"In  the  Act  of  1913,  it  would  have  been  easy  to  require  a  trus- 
tee to  pay  an  income  tax  on  income  received  by  him  for  unborn 
beneficiaries  or  for  the  trust  or  the  estate.  But  Congress  did  not  do 
so.  In  the  next  act,  it  did  so.  We  cannot  supply  the  omission  in 
the  earlier  act. '  * 

{Note:  Acts  subsequent  to  the  1913  Act  specifically  declare 
that  the  income  accumulated  in  trust  for  the  benefit  of  unborn  or 
unascertained  persons  shall  be  taxed  and  assessed  to  the  trustee.) 

SMIETANKA,  COLLECTOR  v.  INDIANA  STEEL  COMPANY 

(U.  S.  Supreme  Court,  October  24,  1921) 
(Not  yet  reported) 

Record:  Act  of  August  5,  1909,  Comp.  Stat.  Sec.  1635,  and 
Comp.  Stat.  Sec.  1594,  Suit  to  recover  special  excise  taxes  paid 
under  duress.  On  a  certificate  from  the  United  States  Circuit 
Court  of  Appeals  for  the  Seventh  Circuit. 

Facts :  The  taxes  were  collected  by  S.  M.  Fitch,  then  collector 
of  internal  revenue,  and  it  was  certified  by  the  district  court  that 
there  was  probable  cause  for  the  act  of  the  collector,  and  that  the 
amounts  recovered  should  be  paid  out  of  the  proper  appropriation 
from  the  Treasury  of  the  United  States. 


545  U.  S.  TAX  CASES  981 

Questions:  (1)  Assuming  that  the  declaration  states  a  good 
cause  of  action  had  the  suit  been  brought  against  S.  M.  Fitch,  does 
it  state  any  cause  of  action  against  his  successor  who  had  no  par- 
ticipation in  the  collection,  receipt,  or  disbursement  of  such  taxes? 

(2)  May  suit  in  the  district  court  of  the  United  States  prop- 
erly be  brought  and  maintained  against  a  collector  for  the  recovery 
of  the  amount  of  a  tax,  unlawfully  assessed  and  collected,  but  in 
the  collection  and  disbursement  of  which  such  collector  had  no 
agency,  the  entire  transaction  of  such  assessment,  collection,  and 
disbursement  having  occurred  during  the  incumbency  of  such  office 
of  a  predecessor  in  office  of  such  collector  ? 

Decision:  (1)  The  statutes  recognizing  suits  against  collec- 
tors in  such  cases  can  not  be  construed  to  create  a  new  statutory 
liability  attached  to  the  office  and  passing  to  successors.  The  action 
still  is  personal. 

(2)  The  general  provision  in  the  Act  of  February  8,  1899,  to 
the  effect  that  a  suit  by  or  against  an  officer  of  the  United  States 
in  his  official  capacity  shall  not  abate  by  reason  of  his  death,  etc., 
but  that  the  court  may  allow  the  same  to  be  maintained  against 
his  successor  in  office,  is  not  applicable  here  because  the  statute 
supposes  a  suit  already  begun  against  the  officer  in  his  lifetime. 
Whether,  even  if  this  point  were  waived,  the  provision  would  apply 
to  a  suit  of  this  kind  is  at  least  doubtful. 

Answer  to  Questions  1  and  2 :     No. 

SMIETANKA,  COLLECTOR  v.  ULLMAN 

(U.  S.  Circuit  Court  of  Appeals,  Seventh  Cir.,  July  20,  1921) 
(275  Fed.  814) 

Record:  Bill  against  the  defendant  collector  to  require  ac- 
ceptance of  Liberty  Bonds  at  face  value  in  payment  of  Federal 
estate  tax.  From  a  judgment  of  the  U.  S.  District  Court,  N.  D. 
Illinois,  E.  D.  in  favor  of  complainant,  defendant  appealed.  Re- 
versed, demurrer  ordered  sustained,  and  bill  dismissed. 

Facts:  Complainant  was  executrix  and  sole  heir  under  the 
will  of  her  deceased  husband  who  died  May  27,  1918.  On  October  22, 
1917,  the  decedent  had  subscribed  for  $20,000  of  Second  Liberty 


982  545  U.  S.  TAX  CASES 

Loan  4%  Bonds,  which  were  issued  on  November  15,  1917,  and 
which  were  by  him  converted  into  Third  Liberty  Loan  4^/4%  Bonds, 
which,  for  the  same  aggregate  amount,  were  issued  to  him  on  May 
9,  1918,  and  remained  in  his  possession  until  his  death.  The  Fed- 
eral estate  tax  upon  the  estate  of  the  decedent  was  assessed  at  $18,- 
285.57,  in  payment  of  which  plaintiff  tendered  to  the  defendant 
as  collector  $18,000  of  these  4^/^%  bonds,  at  par,  with  sufficient 
cash  to  make  the  total  of  the  estate  tax.  Defendant  refused  to 
receive  the  bonds  as  payment  on  such  estate  tax.  Section  14  of 
the  Third  Liberty  Bond  Act  prescribes  that  "any  bonds  of  the 
United  States  bearing  interest  at  a  higher  rate  than  4  per  centum 
per  annum  •  •  •  which  have  been  owned  by  any  person  con- 
tinuously for  at  least  six  months  prior  to  the  date  of  his  death 
*  *  *"  shall  be  redeemable  for  estate  taxes.  This  was  the  only 
provision  for  receivability  of  these  bonds  for  taxes  to  the  Gov- 
ernment. 

Questions:  (1)  Should  the  time  the  decedent  held  the  4% 
bonds  be  reckoned  in  the  holding  period,  in  which  case  it  would 
exceed  the  six  months,  thus  making  the  bonds  tendered  receivable 
in  payment  of  the  tax  in  question? 

(2)  If  Section  14  is  not  capable  of  this  construction,  does  it 
work  such  an  unwarranted  discrimination  against  that  class  of 
holders  whose  death  occurs  during  the  six  months  period  after  the 
issue  of  the  bonds  as  to  render  it  unconstitutional  ? 

Decision:  (1)  "It  is  very  plain  that,  where  one  subscribes 
for  and  acquires  bonds  under  the  Act  and  dies  before  the  expira- 
tion of  six  months,  still  holding  the  bonds,  the  definite  terms  of 
the  Act  would  prevent  their  receivability  in  payment  of  a  Federal 
estate  tax.  *  •  •  gut  there  is  nothing  in  the  situation  to  sug- 
gest an  intention  to  grant  to  holders  of  the  converted  bonds  any 
larger  or  better  privilege  or  immunity  in  this  respect  than  would 
be  enjoyed  by  those  who  would  subscribe  for  the  third  issue,  and  we 
find  nothing  in  the  wording  of  Section  14  from  which  it  would  fol- 
low that  the  time  of  prior  holding  of  the  4  per  cent  bonds  may  be 
added  to  the  time  following  their  conversion  into  4^/4  per  cents  in 
order  to  fulfill  the  statutory  requirements  of  six  months'  continuous 


545  U.  S.  TAX  CASES  983 

holding  of  the  latter  before  the  right  of  receivability  for  federal 
estate  taxes  arises." 

(2)  "We  fail  to  see  any  merit  whatever  in  the  contention  [that 
section  14  is  unconstitutional].  The  classification  was  reasonable 
and  proper  to  be  made.  In  this  respect  it  treated  all  persons  alike, 
for,  while  "no  man  knoweth  the  day  of  his  death,"  the  uncertainty 
is  not  peculiar  to  any  class,  but  is  present  with  all  persons.  The  six 
months  provision  would  have  the  tendency  of  inducing  in  every  one 
a  disposition  to  hold  at  least  so  many  of  the  41/4  per  cent  bonds  as 
might  be  deemed  necessary  to  meet  the  estimated  amount  of  a  fed- 
eral estate  tax  in  case  of  death,  and  thus  tend  to  prevent  throwing 
the  bonds  on  the  market  and  depreciating  their  market  value." 

SNYDER  V.  BETTMAN 

(U.  S.  Supreme  Court,  June  1,  1903) 
(190  U.  S.  249) 

Record:  Act  of  June  13,  1898,  as  amended  March  2,  1901. 
Suit  to  recover  succession  tax  paid  under  protest.  Demurrer  to  the 
petition  having  been  overruled  by  the  Circuit  Court,  and  final  judg- 
ment entered,  the  case  was  brought  here  by  writ  of  error.    Affirmed. 

Facts :  This  was  an  action  brought  by  the  executor  of  David 
L.  Snyder  against  the  collector  to  recover  $22,000,  succession  tax 
upon  a  legacy  of  $220,000,  bequeathed  to  the  city  of  Springfield, 
Ohio,  in  trust  to  expend  the  income  in  the  maintenance  of  public 
parks. 

Question:  Is  it  within  the  power  of  the  Federal  government 
to  impose  a  succession  tax  upon  a  bequest  to  a  municipal  corpora- 
tion of  a  State  for  a  corporate  and  public  purpose  ? 

Decision:  "Having  determined,  then,  that  Congress  has  the 
power  to  tax  successions ;  that  the  States  have  the  same  power,  and 
that  such  power  extends  to  bequests  to  the  United  States,  it  would 
seem  to  follow  logically  that  Congress  has  the  same  power  to  tax 
the  transmission  of  property  by  legacy  to  States,  or  their  munici- 
palities, and  that  the  exercise  of  that  power  in  neither  case  conflicts 
with  the  proposition  that  neither  the  Federal  nor  the  state  govern- 
ment can  tax  the  property  or  legacies  of  the  other,  since,  as 


984  545  U.  S.  TAX  CASES 

repeatedly  held,  the  taxes  imposed  are  not  upon  property,  but  upon 
the  right  to  succeed  to  property. ' ' 

SOUTH  CAROLINA  v.  UNITED  STATES 

(U.  S.  Supreme  Court,  December  4,  1905) 
(199  U.  S.  437) 

Record:  Sections  3140,  3232,  and  3244,  R.  S.  Action  to 
recover  tax  paid.  Appeal  from  judgment  for  the  United  States  in 
the  Court  of  Claims.    39  Ct.  Cls.  257.    Judgment  affirmed. 

Facts:  By  statute,  the  State  of  South  Carolina  established 
dispensaries  for  the  sale  of  intoxicating  liquor  and  prohibited  sale 
by  other  dispensers.  The  authorized  dispensers  had  no  interest  in 
the  sales,  and  received  no  profit  therefrom.  The  entire  profit  went 
to  the  State.  The  license  taxes  prescribed  by  the  Internal  Revenue 
Act  for  dealers  in  liquors  were  paid  by  the  state,  without  protest, 
for  a  number  of  years,  and  this  action  was  subsequently  brought  for 
recovery  of  the  amounts  so  paid. 

Question:  Are  persons  who  are  selling  liquor  relieved  from 
liability  for  the  internal  revenue  tax  by  the  fact  that  they  have  no 
interest  in  the  profits  of  the  business  and  are  simply  agents  of  a 
state  which,  in  the  exercise  of  its  sovereign  power,  has  taken  charge 
of  the  business  of  selling  intoxicating  liquors? 

Decision:  "Now,  if  it  be  well  established,  as  the  authorities 
say,  that  there  is  a  clear  distinction  as  respects  responsibility  for 
negligence  between  the  powers  granted  to  a  corporation  for  govern- 
mental purposes  and  those  in  aid  of  a  private  business,  a  like  dis- 
tinction may  be  recognized  when  we  are  asked  to  limit  the  full 
power  of  imposing  excises  granted  to  the  national  government  by 
an  implied  inability  to  impede  or  embarass  a  state  in  the  discharge 
of  its  functions.  It  is  reasonable  to  hold  that  while  the  former  may 
do  nothing  by  taxation  in  any  form  to  prevent  the  full  discharge  by 
the  latter  of  its  governmental  functions,  yet  whenever  a  state 
engages  in  a  business  which  is  of  a  private  nature,  that  business  is 
not  withdrawn  from  the  taxing  power  of  the  nation. ' ' 


545  U.  S.  TAX  CASES  985 

STATE  ex  rel.  DUHANEY  v.  NYGAARD 

(Supreme  Court  of  Wis.,  July  28,  1921) 
(183  N.  W.  884) 

Record:  Wisconsin  Income  Tax  Act  of  1917  and  State  Con- 
stitution Art.  8,  Sec.  1,  as  amended  in  1908.  Certiorari  to  review 
proceedings  of  county  income  tax  board  of  review.  Appeal  by 
respondent  from  order  of  circuit  court  setting  aside  an  assessment 
of  income  tax.    Reversed  and  remanded. 

Facts :  The  plaintiff,  a  resident  of  Wisconsin,  received  during 
the  income  tax  year  in  question  stock  dividends  from  a  foreign  cor- 
poration. The  taxing  authorities  included  these  dividends  in  plain- 
tiff's taxable  income.  This  action  was  in  accordance  with  the  pro- 
visions of  the  Act  of  1917  which  expressly  provides  for  the  inclusion 
of  stock  dividends  in  taxable  income.  The  Wisconsin  Constitution 
provides  that  taxes  "may  also  be  imposed  on  incomes    *    *    *." 

Question:  Are  stock  dividends  paid  by  a  corporation  from 
earnings  or  profits  "income"  within  the  meaning  of  that  term  as 
used  in  the  state  constitution  ? 

Decision :  In  the  case  of  Soehnlein  v.  Soehnlein,  146  Wis.  330, 
this  court  held  that,  as  between  a  life  tenant  and  a  remainderman, 
stock  dividends  were  income  to  which  the  life  tenant  was  entitled. 
While  the  rule  laid  down  in  that  case  is  not  absolutely  controlling 
in  the  present  case,  it  has  an  important  bearing  on  the  meaning  of 
the  words  as  declared  by  this  court.  The  court  can  see  no  reason 
for  giving  the  word  a  different  meaning  as  between  a  taxpayer  and 
the  state,  unless  it  had  acquired  such  differing  meaning  before  the 
constitutional  amendment  was  adopted,  and  there  is  no  indication 
that  any  such  meaning  had  been  acquired.  Massachusetts  and  New 
York  cases  holding  that  stock  dividends  are  income  are  cited  and 
the  rule  adopted  by  them  approved,  instead  of  the  rule  to  the  con- 
trary which  prevails  in  the  federal  courts. 


986  545  U.  S.  TAX  CASES 

SUCCESSION  OF  GHEENS 

(Supreme  Court  of  La.,  Feb.  28, 1921) 

(148  La.  1017,  88  So.  253) 

Record:  Louisiana  Inheritance  Tax  Act.  Proceeding  to  de- 
termine amount  of  inheritance  tax.  From  a  judgment  fixing  the 
tax  an  appeal  is  taken.    Affirmed. 

Facts :    See  Question  below. 

Question:  Should  the  amount  paid  the  federal  government 
($43,617.37)  under  the  Revenue  Act  of  September  8,  1916,  Title  2, 
be  deducted  from  the  mass  before  computing  the  sum  due  the  state  ? 

Decision :  The  tax  levied  under  the  Revenue  Act  of  1916  pur- 
ports to  be  assessed  against  the  estate  of  a  decedent,  but  in  fact  is 
only  a  tax  upon  the  transfer  thereof  to  those  whom  the  law  or  the 
decedent  has  given  it.  If  it  were  upon  the  estate  itself,  the  same 
would  be  a  direct  tax  and  the  statute  would  be  in  conflict  with  the 
federal  constitution,  requiring  all  direct  taxes  to  be  levied  accord- 
ing to  population.  Whatever  amount  has  been  paid  to  the  tax  col- 
lector of  the  United  States  is  a  matter  between  it  and  the  heirs  or 
succession  representative,  and  cannot  be  considered  in  fixing  the 
amount  of  inheritance  tax  due  the  state. 

THOME  V.  LYNCH,  COLLECTOR 
(U.  S.  District  Court,  D.  Minn.,  Third  Division,  February  17, 1921) 

(269  Fed.  995) 

Record:  Sec.  35,  National  Prohibition  Act;  Sec.  3224,  R.  S. 
On  motion  by  plaintiffs  for  preliminary  injunction  in  suits  in 
equity.  Injunction  issued  in  all  of  the  cases  except  two,  which 
were  dismissed  on  motion  for  misjoinder  of  plaintiffs,  without  preju- 
dice to  the  plaintiffs  to  file  separate  bills. 

Facts :  The  plaintiffs  received  from  the  defendant  notices  in 
writing  stating  that  certain  amounts  of  "taxes  and  penalties,"  etc., 
had  been  assessed  against  the  plaintiffs,  and  demanding  payment 
within  ten  days;  that  failure  to  make  payment  would  be  followed 
by  further  penalties  of  5  per  cent  and  interest.  At  the  expiration 
of  the  period  a  second  notice  was  received,  sent  from  the  defendant, 
demanding  the  original  amount  plus  the  penalty,  5  per  cent,  and 


545  U.  S.  TAX  CASES  987 

containing  a  statement  that  failure  to  pay  would  be  followed  by 
seizure  and  sale  of  property.  Thirty-four  separate  actions  were 
then  commenced  against  the  defendant  collector,  praying  for  injunc- 
tions restraining  him  from  proceeding  to  collect  the  alleged  taxes 
and  penalties.    All  of  the  cases  were  tried  together. 

Questions:  (1)  Are  the  so-called  taxes  and  penalties,  which 
have  been  assessed  by  the  Commissioner  of  Internal  Revenue  and 
sought  to  be  collected  by  the  Collector  of  Internal  Revenue,  in  fact 
taxes  within  the  meaning  of  that  term  as  used  in  Section  3224  R.  S.  ? 

(2)  Though  not  a  tax  within  said  section,  is  the  proceeding 
adopted  by  the  Commissioner  and  Collector  nevertheless  a  proper 
method  of  collecting  the  amount  claimed  ? 

(3)  Are  the  plaintiffs  entitled  to  a  preliminary  injunction? 
Decision:     (1)  "In  view  of  the  foregoing  considerations,  I 

have  reached  the  conclusion  that  all  of  the  exactions  provided  in 
Section  35,  whether  called  taxes  or  penalties,  so  far  as  they  apply 
to  the  manufacture  or  sale  of  intoxicating  liquor  for  beverage  pur- 
poses, stand  on  the  same  footing  and  have  the  same  essential  char- 
acter. Also,  and  in  view  of  the  foregoing  considerations,  it  ap- 
pears more  reasonable  to  hold  that  all  of  said  exactions  in  Sec- 
tion 35,  so  far  as  they  apply  to  the  manufacture  and  sale  of  intoxi- 
cating liquor  for  beverage  purposes,  are  penalties,  rather  than  taxes. 
To  hold  these  exactions  to  be  taxes,  and  collectible  by  distraint, 
would,  in  the  instant  cases,  be  to  hold  that  searches  and  seizures 
may  be  made  in  private  residences  upon  suspicion,  without  warrant ; 
that  these  plaintiffs  may  be  compelled  to  give  evidence  against 
themselves  as  to  the  commission  of  a  criminal  offense ;  that  they  may 
be  punished  for  alleged  violation  of  law,  without  having  had  a 
day  in  court ;  that  they  may  be  deprived  by  administrative  officers 
of  a  jury  trial  for  an  alleged  criminal  offense.  Such  results  as 
these  I  do  not  believe  were  intended  by  Congress." 

(2)  "Title  2,  Sec.  28,  of  the  National  Prohibition  Act,  confers 
on  the  Internal  Revenue  Commissioner  and  subordinate  officers,  for 
the  enforcement  of  the  National  Prohibition  Act,  the  powers  which 
are  conferred  by  law  for  the  enforcement  of  existing  laws  relating 
to  the  manufacture  and  sale  of  intoxicating  liquors    *    •    *.    Those 


988  545  U.  S.  TAX  CASES 

powers  include  the  enforcement  by  distraint  in  cases  of  special  taxes 
and  certain  penalties  annexed  to  them  under  the  internal  revenue 
laws.  But  if,  as  we  have  seen,  the  exactions  under  Section  35  of 
the  National  Prohibition  Act  are  none  of  them  taxes,  but  all  of  them 
penalties,  so  far  as  they  relate  to  the  manufacture  or  sale  of  intoxi- 
cating liquor  for  beverage  purposes,  then  it  follows  that  Section  28 
gives  no  power  to  collect  these  penalties  by  distraint  *  *  •. 
Finally,  the  procedure  by  distraint  for  the  collection  of  penalties, 
as  is  now  threatened  in  the  present  cases,  is  open  to  grave  constitu- 
tional objections.  As  already  noted,  there  has  been  no  adjudication 
in  court  as  to  the  liability  of  the  plaintiff;  the  liability  is  denied; 
there  has  been  no  hearing.  In  many  of  the  eases  alleged  evidence 
has  been  obtained  by  illegel  searches  and  seizures.  Procedure  by 
distraint  under  such  circumstances  would  not  be  due  process  of 
law." 

(3)  *'If  the  foregoing  conclusion  as  to  the  nature  of  the  exac- 
tions be  correct,  then  Section  3224  is  not  a  bar  to  the  relief  sought. 
And  for  the  same  reasons  the  remedies  provided  in  Sections  3225 
and  3226,  R.  S.  (Comp.  St.  Sees.  5948,  5949),  have  no  application  to 
the  instant  cases.  Nor  is  it  an  adequate  remedy  at  law  for  the 
plaintiffs  to  pay  the  exactions  demanded,  and  sue  for  recovery.  In 
some  cases  it  is  alleged  that  it  is  impossible  for  plaintiffs  to  pay  the 
amounts  demanded,  sums  running  as  high  as  $6,500,  and  that  seizure 
and  sale  would  ruin  plaintiff's  business  and  means  of  livelihood. 
The  equities  in  favor  of  the  plaintiffs  are  strong  and  persuasive." 

TITLE  GUARANTY  &  TRUST  COMPANY  v.  EDWARDS, 

COLLECTOR 

(U.  S.  District  Court,  S.  D.  New  York.    February  14,  1922) 

(Not  yet  reported) 
Record :     Revenue  Act  of  1916.      Action  to  recover  a  federal 
estate  tax  assessed  and  collected  by  defendant.     Judgment  for 
defendant. 

Facts :  The  plaintiffs,  as  executors  of  the  estate  of  Joseph  W. 
Teets,  deceased,  brought  this  action  to  recover  a  federal  estate  tax 
assessed  against  the  estate  of  the  decedent  and  collected  by  the 
defendant,  the  collector  of  internal  revenue. 


545  U.  S.  TAX  CASES  989 

Questions:  (1)  Is  the  Federal  Estate  Tax  Act  unconstitu- 
tional ? 

(2)  Is  the  New  York  Transfer  Tax  deductible  from  the  gross 
estate  in  determining  the  net  estate  subject  to  tax? 

(3)  Where  a  widow  elects  to  accept  a  provision  made  in  lieu 
of  dower,  must  property  passing  under  such  provision  be  included 
in  the  gross  estate  of  the  decedent  ? 

Decision:  (1)  "The  recent  decision  of  the  Supreme  Court  in 
New  York  Trust  Co.  et  al.,  as  executors,  v.  Mark  Eisner,  decided 
May  16,  1921,  expressly  held  that  the  Federal  Estate  Tax  Act  was 
constitutional.    *    *    *." 

(2)  "These  various  cases  can  be  reconciled  only  upon  the 
theory  that  the  New  York  Transfer  Taxes  are  not  a  charge  upon 
the  estate  as  a  whole,  but  upon  the  particular  gifts  by  the  testator. 
These  imposts  are  at  different  rates  depending  on  the  relation  of 
the  beneficiary  to  the  testator  and  in  some  cases  where  religious 
or  charitable  gifts  are  involved,  no  tax  is  exacted.  But  whatever  be 
the  nature  or  the  incidence  of  the  tax,  the  Supreme  Court  in  the 
case  of  New  York  Trust  Company,  et  al.,  as  executor,  v.  Eisner, 
supra,  has  expressly  passed  upon  the  question  whether  it  can  be 
deducted  in  computing  the  taxable  estate,  and  has  held  adversely  to 
plaintiff 's  contention,  and  I  am  bound  to  follow  this  decision. ' ' 

(3)  "The  decisions  of  the  New  York  courts  as  to  the  effect  of 
the  New  York  Transfer  Tax  Act  are  uniform  and  hold  that  a  devise 
or  bequest  in  lieu  of  dower  cannot  be  diminished  for  purposes  of 
taxation  by  the  value  of  the  widow's  dower  right  *  *  *.  I  think 
the  argument  of  counsel  for  the  defendant  is  sound  that  if  the  New 
York  Transfer  Tax  Act,  which  lays  the  tax  on  the  value  of  the  prop- 
erty passing  to  the  beneficiary,  does  not  allow  a  deduction  of  her 
dower  right,  such  deduction  cannot  be  properly  made  under  the 
Federal  Estate  Tax  Act  where  taxation  is  based  upon  the  estate 
which  the  decedent  parts  with.  A  legacy  in  lieu  of  dower  after 
election  resembles  the  residuary  gift  which  becomes  operative  or  is 
suggested  by  the  refusal  of  a  specific  legatee  to  take.  In  the  latter 
case,  as  was  held  in  Matter  of  Wolfe,  89  A.  D.  349,  affirmed  179 
N.  Y.  599,  the  tax  is  upon  the  amount  received  by  the  residuary 
legatee  after  the  refusal  of  the  specific  legatee  to  take. ' ' 


990  545  U.  S.  TAX  CASES 

UNION  TRUST  COMPANY  v.  WARDELL,  COLLECTOR 

(U.  S.  Supreme  Court,  May  1,  1922) 
(Not  yet  reported) 

Record :  Estate  Tax  Act  of  September  8,  1916.  In  error  to 
U.  S.  District  Court,  N.  D.  California,  to  review  a  judgment  which 
dismissed  the  complaint  in  a  suit  against  the  collector  of  internal 
revenue  to  recover  back  the  federal  estate  tax  as  having  been  unlaw- 
fully collected.  273  Fed.  733,  ante  517.  Reversed  and  remanded 
for  further  proceedings. 

Facts:  On  May  31,  1901,  the  decedent,  by  trustee,  assigned 
certain  securities  to  her  son,  as  trustee,  to  pay  the  income  therefrom 
to  the  decedent  during  her  life  time,  and  after  her  death,  to  dis- 
tribute the  securities  to  certain  relatives.  The  decedent  died  on 
November  14,  1916.  The  will  was  duly  probated  and  the  tax  under 
the  Act  of  September  8,  1916,  was  paid  on  the  property  which 
passed  under  her  will  but  no  tax  was  paid  on  the  4,985  shares  trans- 
ferred 15  years  before  by  the  trust  deed.  The  Commissioner,  having 
ruled  that  those  shares  were  subject  to  a  tax,  assessed  against  them 
the  sum  of  $4,545.50.  It  was  paid  under  protest  and  this  action 
brought  for  its  recovery. 

Questions:  (1)  Was  the  Act  of  September  8,  1916,  retroac- 
tive, so  as  to  apply  to  a  transfer  intended  to  take  effect  in  possession 
or  enjoyment  at  or  after  death,  where  the  transfer  was  made  prior 
to  the  passage  of  the  Act  ? 

(2)  Was  the  lower  court  correct  in  bringing  into  the  case,  on 
motion  of  the  plaintiff,  the  successor  to  the  collector  of  Internal 
Revenue  who  had  collected  the  taxes  sought  to  be  recovered  ? 

Decision:  (1)  "The  same  contentions  are  made  against  and 
for  the  ruling  of  the  court  as  were  made  in  Shwab  v.  Doyle.  It 
is  not  necessary  to  repeat  them.  They  are,  with  but  verbal  varia- 
tions, the  same  as  in  Shwab  v.  Doyle,  and  the  Commissioner  so  con- 
sidering, submits  this  case  upon  his  brief  in  that.  We  have  there 
stated  them  and  pass  judgment  upon  that  which  we  think  deter- 
mines the  case,  that  is,  the  retroactivity  of  the  Act  of  September  8, 
1916.    The  facts  in  this  case  fortify  the  reasoning  in  that.    In  this 


545  U.  S.  TAX  CASES  991 

case  the  Act  is  given  operation  against  an  instrument  executed  15 
years  before  the  passage  of  the  act. ' ' 

(2)  The  Collector  of  Internal  Revenue  who  had  no  part  in  the 
collection  or  disbursement  of  a  tax  assessed  and  collected  by  his 
predecessor  in  office  may  not  be  brought  in  as  a  party  to  a  suit 
begun  while  the  latter  was  still  in  office  to  recover  back  the  amount 
of  the  tax  as  having  been  unlawfully  collected 

UNITED  STATES  v.  GUINZBURG 

(U.  S.  Circuit  Court  of  Appeals,  Second  Cir.,  Dec.  14,  1921) 
(278  Fed.  363) 

Record :  Act  of  October  3, 1913.  Action  by  the  United  States 
to  recover  amount  of  income  tax  alleged  to  be  due.  Judgment  for 
defendant  in  District  Court  and  the  United  States  brings  error. 
Affirmed. 

Facts:  On  February  17,  1913,  the  I.  B.  Kleinert  Rubber 
Company  declared  a  dividend  of  18  per  cent  to  common  stock- 
holders of  record  on  January  30,  1913.  This  dividend  was  payable 
July  1,  1913.  The  dividend  was  declared  out  of  profits  of  the  com- 
pany earned  during  the  year  1912.  Guinzburg  was  a  stockholder  in 
the  company  on  January  30, 1913,  and  received  a  dividend,  amount- 
ing to  $70,380,  which  he  did  not  include  in  his  return  for  1913.  The 
Act  of  1913  provided  that  for  the  year  ending  December  31,  1913, 
the  tax  should  be  computed  on  the  net  income  accruing  from  March 
1  to  December  31,  of  that  year. 

Question:  Did  the  dividend  in  question  accrue  to  the  tax- 
payer before  March  1,  1913,  so  as  to  be  taxable  under  the  Act  of 
1913? 

Decision:  "We  conclude  that,  upon  the  declaration  of  a 
dividend,  the  debt  was  immediately  created  in  favor  of  the  defend- 
ant in  error,  payable  at  a  future  date.  By  that  action  a  vested  right 
was  created  in  favor  of  the  stockholder,  who  could  sell  his  right  by 
assigning  or  pledging  or  otherwise  disposing  of  it,  and  this  was  not 
income  arising  and  accruing  within  the  meaning  of  the  statute,  such 
as  might  be  taxed  under  the  Income  Tax  Act  of  March  1,  1913,  here 
in  question."  We  find  no  error  below,  and  the  direction  of  a 
judgment  for  the  defendant  is  affirmed. 


992  545  V.  S.  TAX  CASES 

UNITED  STATES  v.  MELLON 

(U.  S.  Circuit  Court  of  Appeals,  Third  Cir.,  March  Term,  1922) 

(281  Fed.  645) 

Record:  Act  of  October  3,  1913.  Action  by  United  States 
against  William  Larimer  Mellon  to  recover  amount  of  income  tax 
alleged  to  be  due.  In  the  District  Court  a  jury  was  waived  and  the 
case  tried  by  the  judge,  who  found  a  verdict  for  defendant.  There- 
upon the  United  States  sued  out  this  writ  of  error.  Judgment  af- 
firmed.   For  case  below,  see  279  Fed.  910,  ante  551. 

Facts :  The  defendant  was  the  owner  of  shares  of  stock  of  the 
Gulf  Oil  Corporation.  While  the  earnings  of  this  company  had 
been  large  it  had  never  declared  a  dividend,  its  earnings  having 
been  used  in  development  and  extensions.  The  company  was  heavily 
in  debt,  its  loans  being  carried  on  the  credit  and  endorsement  of 
some  of  its  large  stockholders.  At  the  close  of  the  year  1912,  the 
company  was  without  sufficient  working  capital  and  its  affairs  called 
for  refinancing.  The  capital  stock  of  the  company  at  this  time  was 
$11,208,200,  its  indebtedness  $15,000,000,  and  against  this  indebted- 
ness it  had  quick  assets  of  $12,500,000.  To  meet  this  situation,  the 
following  plan  was  carried  out.  The  capital  stock  was  increased  to 
$60,000,000,  and  it  was  determined  that  $11,280,200  of  this  stock 
was  to  be  sold  at  par  to  present  stockholders  for  cash.  To  induce 
the  stockholders  to  buy  this  stock,  every  purchaser  was  to  receive, 
in  addition  to  the  stock  which  he  bought  at  par,  100%  of  extra 
stock.  In  order  to  insure  the  success  of  this  plan,  all  of  the  directors 
of  the  company,  including  the  defendant,  all  of  whom  were  large 
stockholders,  agreed  in  advance  to  so  accept  and  pay  for  their  pro- 
portionate amount  of  stock;  and  at  the  same  time  A.  W.  Mellon 
and  R.  B.  Mellon,  who  were  large  stockholders,  who  had  endorsed 
the  outstanding  paper  of  the  company  in  procuring  its  credit, 
agreed  that,  in  case  any  stockholders  should  decline  to  take  their 
proportionate  amount  in  stock,  they  would  take  and  pay  to  the 
corporation  par  for  all  shares  that  might  be  declined.  Any  stock- 
holder outside  of  the  persons  just  named,  who  declined  to  subscribe 
for  stock,  would  thus  receive  in  cash  the  par  value  of  the  bonus 
stock  which  he  would  otherwise  have  received  as  a  bonus  for  his 


545  U.  S.  TAX  CASES  993 

subscription.  The  court  found  that  without  this  understanding 
the  dividend  of  100%  could  not  and  would  not  have  been  declared 
and  also  that,  at  the  time  of  the  declaration  and  payment  of  the 
dividend,  the  corporation  did  not  have  cash  with  which  to  pay  the 
same  or  any  substantial  part  thereof. 

Question :  Did  the  stock  received  by  the  defendant  under  the 
circumstances  stated  above  constitute  taxable  income  to  him  ? 

Decision :  *  *  From  all  of  this,  it  is  quite  evident  that  all  of  the 
acts  of  the  company,  whether  called  issues  of  stock  or  declarations 
of  dividends,  were  in  fact  and  reality  a  re-financing  of  the  corpora- 
tion, in  which  this  defendant  and  other  large  stockholders  bound 
themselves  to  pay,  and  in  fact  did  pay,  into  the  company's  treasury, 
the  additional  capital  which  it  required.  Their  position  was  not  that 
of  having  an  option  to  take  stock  or  to  take  money,  but  it  was  an 
obligation  to  take  stock  for  which  they  agreed  to  pay.  The  common 
understanding  of  *  income '  is  something  coming  to  a  man,  and  is  not 
aptly  described  by  a  transaction  where  he  is  forced  to  pay  and  does 
pay  money  to  a  company  which  did  not,  and  was  not  able  to,  pay 
dividends,  and  which  therefore  was  not  able  to  increase  his  income. 

"We  are  of  opinion  the  court  below  was  justified  under  the 
facts  in  finding  the  defendant  received  no  income  from  the  Gulf  Oil 
Company  and  was  therefore  not  liable  to  the  Government  to  pay  the 
alleged  income  tax  for  which  this  suit  was  brought. ' ' 

UNITED  STATES  v.  PERKINS 

(U.  S.  Supreme  Court,  May  25,  1896) 
(163  U.  S.  625) 

Record:  New  York  Inheritance  Tax  Act.  Writ  of  error  to 
an  order  of  the  Supreme  Court  of  the  State  of  New  York.    Affirmed. 

Facts :  One  Merriam  died  on  January  30,  1889,  leaving  a  will 
by  which  he  devised  and  bequeathed  all  of  his  property  to  the 
United  States  Government.  The  Surrogate  fixed  a  tax  of  $3,964.23 
upon  personal  property  passing  to  the  United  States  under  the 
terms  of  the  will.  On  appeal  this  order  was  affirmed  by  the  Su- 
preme Court  and  the  Court  of  Appeals  of  New  York, 


994  545  U.  S.  TAX  CASES 

Question :  Is  it  within  the  power  of  the  state  to  tax  bequests 
to  the  United  States? 

Decision :  After  a  discussion  of  numerous  cases  holding  that 
an  inheritance  tax  is  not  a  tax  upon  the  property  itself,  but 
upon  its  transmission  by  will  or  by  descent,  the  court  concluded 
that :  "We  think  that  it  follows  from  this  that  the  act  in  question 
is  not  open  to  the  objection  that  it  is  an  attempt  to  tax  the  property 
of  the  United  States,  since  the  tax  is  imposed  upon  the  legacy  be- 
fore it  reaches  the  hands  of  the  government.  The  legacy  becomes 
the  property  of  the  United  States  only  after  it  has  suffered  a  dim- 
inution to  the  amount  of  the  tax,  and  it  is  only  upon  this  condition 
that  the  legislature  assents  to  a  bequest  of  it. ' ' 

UNITED  STATES  v.  PHELLIS 

(U.  S.  Supreme  Court,  Nov.  21,  1921) 
(Not  yet  reported) 

Record :  Act  of  October  3, 1913.  Appeal  from  Court  of  Claims 
to  review  a  judgment  which  sustained  a  claim  for  a  refund  of  cer- 
tain moneys  paid  under  protest  as  an  additional  income  tax. 
Reversed  and  remanded,  with  directions  to  dismiss  the  suit.  For 
case  below  see  ante  p.  404. 

Facts:  In  1915,  E.  I.  du  Pont  de  Nemours  &  Company  was 
organized  as  a  corporation  to  take  over  all  the  assets  and  good  will 
of  E.  I.  du  Pont  de  Nemours  Powder  Company,  a  New  Jersey  cor- 
poration, which  had  a  large  surplus  of  accumulated  profits.  This 
transfer  was  carried  out  by  appropriate  corporate  action,  the  old 
company  receiving  as  consideration  therefor  debenture  stock  of  the 
new  company  and  also  two  shares  of  common  stock  of  the  new  com- 
pany for  each  share  of  its  own  outstanding  capital  stock.  Each 
stockholder  of  the  old  company  retained  his  old  stock  and  besides 
received  a  dividend  of  two  shares  of  stock  of  the  new  company. 

The  personnel  of  the  stockholders  and  officers  of  the  two  com- 
panies was,  at  the  time  of  the  transfer,  identical,  and  the  holders  of 
common  stock  in  both  corporations  had  the  same  proportionate 
interest  in  each.  After  the  reorganization  the  old  corporation  con- 
tinued as  a  going  concern  but,  except  for  the  redemption  of  its 


545  U.  S.  TAX  CASES  995 

outstanding  bonds,  exchange  of  debenture  stock  for  its  preferred 
stock,  the  holding  of  debenture  stock  to  an  amount  equivalent  to  its 
own  outstanding  common,  and  collection  and  disposition  of  divi- 
dends tliereon,  did  not  engage  in  any  business. 

The  fair  market  value  of  the  stock  of  the  New  Jersey  corpora- 
tion just  prior  to  the  reorganization  was  $795  per  share,  and  after- 
wards it  was  $100  per  share.  The  fair  market  value  of  the  stock  of 
the  Delaware  corporation,  distributed,  as  aforesaid  was  $347.50  per 
share.  The  Commissioner  of  Internal  Revenue  held  that  the  shares 
of  the  Delaware  company's  stock  acquired  bj^  the  claimant  was 
income  of  the  value  of  $347.50  per  share,  and  assessed  an  additional 
tax  accordingly. 

Question:  Were  the  shares  of  stock  in  the  new  company 
received  by  the  claimant  as  a  dividend  by  reason  of  his  ownership 
of  stock  in  the  old  company  a  gain  derived  from  capital,  as  distin- 
guished from  a  gain  accruing  to  capital,  and  hence  taxable? 

Decision:  When  the  common  stock  of  the  new  company  was 
distributed  among  the  stockholders  of  the  old  company  as  a 
dividend,  then  at  once — unless  the  two  companies  must  be  regarded 
as  substantially  identical — the  individual  stockholders  of  the  old 
company,  including  claimant,  received  assets  of  exchangeable  and 
actual  value  severed  from  their  capital  interest  in  the  old  company, 
proceeding  from  it  as  the  result  of  a  dividend  of  former  corporate 
profits,  and  drawn  by  them  severally  for  their  individual  and  sepa- 
rate use  and  benefit.  Such  a  gain,  resulting  from  their  ownership 
of  stock  in  the  old  company,  and  proceeding  from  it,  constituted 
individual  income  in  the  proper  sense. 

"That  a  comparison  of  the  market  value  of  claimant's  shares 
in  the  New  Jersey  corporation  immediately  before,  with  the  aggre- 
gate market  value  of  those  shares,  plus  the  dividend  shares,  imme- 
diately after  the  dividend,  showed  no  change  in  the  aggregate, — a 
fact  relied  upon  by  the  court  of  claims  as  demonstrating  that  claim- 
ant neither  gained  nor  lost  peeuniarilj'^  in  the  transaction, — seems 
to  us  a  circumstance  of  no  particular  importance  in  the  present 
inquiry.  *  *  *  That  the  distribution  reduces  the  intrinsic  capital 
value  of  the  shares  by  an  equal  amount  is  a  normal  and  necessary 


996  545  U.  S.  TAX  CASES 

effect  of  all  dividend  distributions,  whether  large  or  small,  and 
whether  paid  in  money  or  in  other  divisible  assets ;  but  such  reduc- 
tion constitutes  the  dividend  none  the  less  income  derived  by  the 
stockholder  if  it  represents  gains  previously  acquired  by  the  cor- 
poration. ' ' 

The  Delaware  company  could  not  be  treated  as  identical  with 
the  New  Jersey  company  because  it  was  a  new  corporation,  organ- 
ized under  the  laws  of  a  different  state,  and  was  to  have  an  author- 
ized capital  stock  of  almost  four  times  the  aggregate  stock  issues 
and  funded  debt  of  the  New  Jersey  company,  of  which  less  than 
one-half  was  to  be  issued  to  the  old  company,  leaving  the  future 
disposition  of  a  majority  of  the  authorized  new  issues  still  to  be 
determined. 

"But,  further,  it  would  be  erroneous,  we  think,  to  test  the 
question  whether  an  individual  stockholder  derived  income  in  the 
true  and  substantial  sense  through  receiving  a  part  in  the  distribu- 
tion of  the  new  shares,  by  regarding  alone  the  general  effect  of  the 
reorganization  upon  the  aggregate  body  of  stockholders.  The  lia- 
bility of  a  stockholder  to  pay  an  individual  income  tax  must  be 
tested  by  the  effect  of  the  transaction  upon  the  individual  *  *  *. 
The  new  common  stock  became  treasury  assets  of  the  old  company, 
and  was  capable  of  distribution  as  the  manufacturing  assets  whose 
place  it  took  were  not.  Its  distribution  transferred  to  the  several 
stockholders  new  individual  property  rights  which  they  severally 
were  entitled  to  retain  and  enjoy,  or  to  sell  and  transfer,  with  pre- 
cisely the  same  substantial  benefit  to  each  as  if  the  old  company  had 
acquired  the  stock  by  purchase  from  strangers."  Whether  the 
stockholder  "sold  the  new  stock  for  money  or  retained  it  in  prefer- 
ence, in  either  case  when  he  received  it,  he  received  as  his  separate 
property  a  part  of  the  accumulated  profits  of  the  old  company 
in  which  previously  he  had  only  a  potential  and  contingent 
interest. ' ' 

"It  thus  appears  that,  in  substance  and  fact,  as  well  as  in 
appearance,  the  dividend  received  by  claimant  was  a  gain,  a  profit, 
derived  from  his  capital  interest  in  the  old  company,  not  in  liquida- 
tion of  the  capital,  but  in  distribution  of  accumulated  profits  of  the 


545  U.  S.  TAX  CASES  997 

company, — something  of  exchangeable  value  produced  by  and 
proceeding  from  his  investment  therein,  severed  from  it,  and  drawn 
by  him  for  his  separate  use.  Hence  it  constituted  individual  income 
within  the  meaning  of  the  Income  Tax  Law,  as  clearly  as  was  the 
case  in  Peabody  v.  Eisner,  247  U.  S.  347,  62  L.  ed.  1152,  38  Sup.  Ct. 
Rep.  546." 

UNITED  STATES  v.  RACHMIL,  et  al. 

(U.  S.  District  Court,  S.  D.  New  York,  Jan.  29,  1921) 

(270  Fed.  869) 

Record:  Penal  Code,  Section  37;  Revenue  Act  of  1918.  In- 
dictment for  attempting  to  evade  income  tax.  Motion  to  quash 
granted. 

Facts :  The  defendant  Bloom  was  previously  brought  to  trial, 
and  acquitted,  upon  an  indictment  which,  in  one  count  thereof 
charged  him  and  his  co-defendants,  Rachmil,  Samuelson,  and  Rosen- 
blum,  with  having  conspired  to  defraud  the  United  States ;  another 
count  of  the  indictment  charged  as  against  the  persons  named  a 
conspiracy  to  commit  an  offense  against  the  United  States,  to-wit,  an 
attempt  willfully  to  deceive  and  evade  the  income  tax  imposed  by 
the  Revenue  Act  of  1918.  In  the  original  indictment  the  overt  acts 
set  up  were  as  follows:  (1)  That  Rachmil  and  Samuelson  pre- 
pared a  fraudulent  income  tax  return  for  Bloom;  (2)  that  Bloom 
signed  the  alleged  fraudulent,  false,  and  incorrect  income  tax 
return;  (3)  that  Rachmil  signed  the  said  return  and  acknowledged 
the  signature  of  the  defendant  Bloom  thereto;  and  (4)  that  the 
defendant  Bloom  filed  and  caused  to  be  filed  with  the  Collector  of 
Internal  Revenue  for  the  Third  District  of  New  York  the  said  false, 
fraudulent,  and  incorrect  income  tax  return.  Having  successfully 
withstood  the  former  prosecution,  the  defendants  Rachmil,  Samuel- 
son and  Bloom  again  find  themselves  under  indictment  charged  with 
having  knowingly,  willfully,  and  unlawfully  attempted  to  defeat 
and  evade  certain  provisions  of  the  aforesaid  taxing  statute.  The 
defendant  Bloom  pleads  in  bar,  first,  that  he  has  already  been  sub- 
jected to  a  trial  of  the  offense  charged  in  the  present  indictment; 
and,  second,  that  all  the  issues  of  fact  which  would  arise  under  a 
plea  of  not  guilty  to  said  indictment  were  presented  upon  the  trial 


998  545  U.  S.  TAX  CASES 

under  the  first  indictment,  and  that  said  issues  having  been  then 
adjudicated  cannot  again  be  the  subject  of  a  further  prosecution. 
Accompanying  the  plea  in  bar  was  a  motion  to  quash. 

Questions:  (1)  Could  the  overt  act  charged  in  the  previous 
indictment  amount  to  an  attempt  to  evade  the  tax  under  the  present 
indictment  ? 

(2)  Would  the  preparation  of  a  false  return,  without  the  filing 
thereof,  constitute  an  attempt  to  evade  a  tax  ? 

(3)  Was  the  issue  here  involved  litigated  in  the  previous  trial? 

Decision:  (1)  ** It  is  impossible  to  tell,  upon  the  general  ver- 
dict of  not  guilty  rendered  by  the  jury  before  which  Bloom  was 
tried,  whether  there  was  a  failure  of  proof  as  to  the  existence  of  the 
conspiracy,  or  the  commission  of  the  overt  acts  set  up  or  both.  It  is, 
however,  none  the  less  the  fact  that  a  conspiracy  to  commit  an 
offense,  and  an  act  done  in  pursuance  and  to  effectuate  the  object 
thereof,  may  easily,  if  it  does  not  necessarily,  comprehend  an 
attempt  to  commit  the  crime  as  to  which  the  conspiracy  relates. ' ' 

(2)  "Were  it  not  for  the  overt  act  last  recited,  I  would  decline 
to  give  further  consideration  to  the  motion  to  quash.  In  other 
words,  the  first  three  overt  acts  fall  short  of  an  attempt  to  violate 
the  taxing  statute.  The  parties  might  have  conspired  to  violate 
the  law,  and  have  done  things  in  pursuance  of  such  conspiracy 
which  in  and  of  themselves  could  by  no  manner  of  means  constitute 
an  attempt  to  violate  the  law  •  *  *.  When,  however,  a  step 
which  has  for  its  purpose  nothing  less  than  an  attempt  to  defeat  the 
Income  Tax  Law  has  taken  place,  namely,  the  filing  of  the  return 
with  the  collector  of  internal  revenue,  the  act  denounced  by  the 
Income  Tax  Law  itself  has  occurred.  I  say  this  because  the  return 
is  then  placed  beyond  the  control  of  the  defendant,  and  the  collector 
in  usual  course  will  use  such  return  as  a  basis  of  assessing  the  tax. 
The  attempt  of  the  defendant,  if  the  return  be  false  and  fraudulent, 
is  complete." 

(3)  "Upon  a  trial  of  the  present  indictment,  the  issue  as  to 
whether  the  return  filed  was  false  and  fraudulent,  would  be  a 
fundamental  proposition.  That  issue  was  involved  in  the  previous 
trial,  and  to  permit  it  to  be  litigated  again  would  come  so  close  to 


545  U.  S.  TAX  CASES  999 

an  encroachment  upon  the  constitutional  rights  of  the  defendants 
as  to  warrant  me  to  quash  the  present  indictment. ' ' 

UNITED  STATES  v.  SAN  JUAN  COUNTY  et  al. 

(U.  S.  District  Court,  W.  D.  Washington,  N.  D.,  January  19,  1922) 

(280  Fed.  120) 

Record:  Revenue  Act  of  1917  and  Section  3466  Rev.  Stat. 
Action  to  recover  income  tax  and  penalties  for  the  year  1917.  Judg- 
ment for  plaintiff. 

Facts :  The  San  Juan  Canning  Co.,  an  insolvent  corporation, 
was  indebted  to  the  United  States  by  reason  of  income  tax  and 
penalties  for  the  year  1917.  On  the  28th  of  May,  1921,  after  demand 
and  refusal  to  pay,  a  warrant  of  distraint  was  levied  upon  the  per- 
sonal property  of  the  Canning  Company,  located  in  San  Juan 
County,  and  sale  advertised  for  June  15,  1921.  Thereafter,  the 
sheriff  of  San  Juan  County  levied  upon  the  property  to  collect 
state  and  county  taxes  for  the  years  1918,  1919,  and  1920,  and 
advertised  the  property  for  sale  June  10,  1921.  On  application  of 
plaintiff  the  restraining  order  was  issued  and  served  upon  the 
sheriff.  The  plaintiff  claimed  that  under  Section  3466  R.  S.  the 
United  States  had  priority.     The  county  contended  the  contrary. 

Question :  Was  the  claim  of  the  United  States  or  that  of  the 
County  entitled  to  priority  as  to  the  property  of  the  insolvent 
corporation  ? 

Decision :  The  power  of  taxation  is  an  indispensable  incident 
to  sovereignty  and  by  the  provisions  of  its  constitution  and  laws,  a 
grant  in  favor  of  the  United  States  is  paramount  in  the  event  of  the 
insolvency  of  the  debtor.  Neither  the  State  or  County  are  judg- 
ment creditors,  mortgagees  or  purchasers,  and  hence  they  are  not 
affected  by  the  provisions  of  section  3186  R.  S.  Therefore,  under 
the  provisions  of  Section  3466  R.  S.  the  United  States  is  entitled  to 
a  decree. 


1000  545  U.  S.  TAX  CASES 

UNITED  STATES  v.  VARIOUS  DOCUMENTS,  etc. 

(U.  S.  Circuit  Court  of  Appeals,  7th  Cir.,  Dec.  14,  1921) 
(278  Fed.  944) 

Record:  Proceeding  by  the  United  States  against  various 
documents,  papers  and  books,  taken  on  search  warrants  and  claimed 
by  Briggs  &  Turivas.  United  States  brings  error  to  review  an  order 
of  the  United  States  Commissioner.    Dismissed. 

Facts :  Commissioner  Mason  of  Chicago,  on  the  affidavit  and 
oral  testimony  of  a  revenue  agent,  issued  a  search  warrant  on  which 
the  Marshal  seized  various  documents,  papers,  and  books  belonging 
to  Briggs  &  Turivas,  Inc.  Thereupon,  Briggs  &  Turivas  appeared 
before  the  Commissioner  and  filed  a  petition  to  have  the  search 
warrant  quashed  and  the  property  returned.  To  this  petition  the 
district  attorney  filed  an  answer ;  and  the  Commissioner,  after  hear- 
ing the  evidence  and  arguments  of  counsel,  entered  an  order  for 
judgment  in  accordance  with  the  prayer  of  the  petition. 

Questions:  Briggs  &  Turvias  insist  that  the  writ  of  error  be 
dismissed  because:  (1)  This  court  has  no  appellate  jurisdiction 
over  the  order  or  judgment  of  the  Commissioner;  (2)  the  proceed- 
ing was  based  upon  the  alleged  commission  of  a  felony,  and  the  case 
was  therefore  of  a  kind  in  which  the  Government  has  no  right  of 
review;  and  (3)  the  order  was  interlocutory. 

Decision:  "In  support  of  the  correctness  of  the  Commis- 
sioner's action  Briggs  &  Turivas  contend:  (1)  No  facts  were  pre- 
sented which  showed  either  direct  or  inferentially  any  probable 
cause  for  believing  that  a  felony  had  been  committed;  (2)  nor  that 
the  seized  property  was  the  means  of  committing  any  felony;  and 
(3)  the  search  warrant  contained  no  particular  description  of  the 
property  to  be  seized  and  was  therefore  only  the  general  warrant 
against  which  the  Fourth  Amendment  was  aimed. "  *    •    * 

"Inasmuch  as  the  record  bears  out  the  contentions  in  support 
of  the  correctness  of  the  Commissioner's  action,  there  is  no  merit  in 
the  government's  writ  of  error.  But  we  have  no  judgment  of  a 
District  Court  before  us  to  affirm,  and  we  therefore  dismiss  the  writ 
on  the  first  ground,  leaving  the  other  grounds  for  dismissal 
untouched." 


545  U.  S.  TAX  CASES  1001 

UNITED  STATES  v.  WADDELL  INVESTMENT  CO. 

(U.  S.  District  Court  W.  D.  Missouri,  W.  D.  Jan.  26,  1921) 
(275  Fed.  934) 

Eecord :  Act  of  August  5,  1909.  Action  by  the  United  States 
to  recover  taxes.    Judgment  for  plaintiff. 

Facts :  The  defendant  was  organized  as  what  is  known  as  a 
loan  and  investment  company.  Under  its  charter,  originally  it 
loaned  money,  taking  back  mortgages  upon  farms  and  other  real  es- 
tate, which  said  mortgages  together  with  the  notes  secured  thereby, 
it  sold  to  its  clients  desiring  investments.  Subsequently,  however,  it 
made  a  change  in  the  form  and  procedure  of  such  transactions,  and 
issued  and  sold  its  own  so-called  first  mortgage  certificates  of  con- 
venient denominations  and  placed  behind  these,  as  security,  with 
a  trustee,  the  notes  secured  by  mortgage  which  it  had  previously 
acquired  and  which,  in  its  former  course  of  business,  it  had  been  its 
practice  to  sell.  In  practice,  as  well  as  in  substance,  it  received 
through  the  trustee  the  interest  upon  its  securities  placed  with  the 
trustee,  and  paid  out  from  such  sources,  and  from  its  other  sources 
of  revenue,  the  interest  accruing  upon  its  first  mortgage  certificates 
sold  by  it  to  investors.  Substantially,  the  difference  between  such 
aggregates  of  interest,  plus  sums  accruing  from  commissions,  con- 
stitutes its  net  income  or  profits. 

Questions:  (1)  Was  the  plaintiff  entitled  to  deduct  from  the 
net  income  shown  on  its  return  the  amount  of  interest  received 
upon  its  mortgages  on  the  theory  that  it  went  directly  to  pay 
the  interest  on  its  first  mortgage  certificates  ? 

(2)  "Would  this  action  lie  without  assessment  having  previously 
been  made  ? 

Decision :  (1)  "It  is  sufficient  to  say  that  there  is  no  identity 
between  such  payments  and  formal  identity  could  not  affect  the 
issue.  The  mortgage  interest  comes  into  its  assets,  and  the  interest 
upon  certificates  is  paid  out  generally  from  such  assets.  The  allow- 
ance of  this  claim  would  have  the  effect,  in  substance,  of  permitting 
the  defendant  company  to  deduct  from  the  gross  amount  of  its  in- 
come interest  paid  on  its  bonded  or  other  indebtedness  to  an  amount 


1002  545  U.  S.  TAX  CASES 

exceeding  its  paid-up  capital  stock.  Aside  from  all  this,  the  income 
from  such  sources  is  income  of  the  defendant  corporation  and 
should  be  considered  and  treated  as  such  for  the  purposes  of  this 
excise  tax." 

(2)  "Where  a  tax  of  a  fixed  percentage  [like  the  one  imposed 
by  Excise  Law  of  1909  on  corporations]  is  so  definitely  described  in 
the  statute  that  its  amount  or  value  •  •  •  can  be  ascertained 
and  determined,  on  evidence,  by  a  court,  a  suit  [therefor]  wiU  lie, 
without  an  assessment." 

VAUGHAN  et  al.,  EXECUTORS  v.  RIORDAN,  COLLECTOR 

(U.  S.  District  Court,  W.  D.  of  N.  Y.,  Oct.  15,  1921) 
(280  Fed.  742) 

Record:  Revenue  Acts  of  1916  and  1917.  Suit  by  executors 
to  recover  federal  estate  taxes  alleged  to  have  been  illegally  col- 
lected.   Judgment  for  plaintiff. 

Facts:  The  decedent  made  a  gift  of  bonds  of  the  value  of 
$273,649.17  to  his  wife  nine  days  before  his  death.  The  total  value 
of  decedent's  estate,  including  the  bonds,  approximated  $2,500,000. 
The  decedent  died  at  the  age  of  71  years.  The  bonds  transferred 
to  the  wife  were  not  included  in  the  estate  tax  return.  There  was 
an  overpayment  of  $9,294.12  on  this  return,  arising  from  a  deduc- 
tion or  allowance  of  a  testamentary  gift  to  a  library.  The  Commis- 
sioner retained  this  overpayment  applying  it  on  the  tax  which  he 
claimed  the  estate  owed  for  the  gift  of  the  bonds  to  the  wife.  The 
executors  protested  and  the  additional  balance  required  by  the  Com- 
missioner was  paid  and  this  action  brought  for  refund  of  the  amount 
assessed  on  the  bonds.  Had  the  bonds  been  included  in  the  tax 
return  the  estate  tax  would  have  been  larger  by  the  amount  of 
$38,310.89. 

Questions:  Was  the  gift  in  question  "made  in  contemplation  of 
death"  within  the  meaning  of  the  statute  and  so  to  be  included  as 
part  of  the  gross  estate. 

(2)  If  the  bonds  were  transferred  to  the  wife  so  that  she 
received  the  income  therefrom  for  household  expenses  and  to  relieve 
the  decedent  of  the  burden  of  paying  them  and  of  including  them 


545  U.  S.  TAX  CASES  1003 

in  his  income  tax  returns,  does  this  fact  make  the  transfer  taxable 
as  part  of  his  estate  on  the  theory  that  it  was  to  take  effect  after 
the  donor's  death? 

(3)  Is  the  amount  of  $9,294.12,  which  had  admittedly  been 
erroneously  paid  by  the  plaintiff,  barred  in  this  action  since  it  was 
not  originally  paid  under  protest  1 

Decision:  (1)  The  court  found  that,  while  the  decedent  had 
been  afflicted  with  diabetes  for  twenty  years  prior  to  the  time  of  his 
death,  his  general  health  was  regarded  as  good  at  the  time  the  gift 
was  made.  Two  days  after  the  gift  was  made  he  was  seized  with  a 
throat  infection,  which  could  not  have  been  anticipated,  which 
aggravated  his  diabetic  condition  and  brought  on  his  death. 
Furthermore,  the  wife  testified  that  her  husband  had  long  intended 
giving  her  the  securities  inasmuch  as  he  had  been  giving  her  income 
from  them  as  a  monthly  allowance.  He  had  stated  at  various  times 
that  he  intended  transferring  them  to  her.  Similar  statements  had 
been  made  to  his  bookkeeper,  who  under  his  orders  had  prepared 
a  list  of  the  bonds  to  be  transferred.  The  court,  therefore,  found 
that  there  was  no  substantial  evidence  that  the  transfer  was  in  con- 
templation of  death  but  that  in  fact  it  was  given  in  good  faith  and 
at  a  time  when  the  decedent  had  no  expectation  or  anticipation  of 
death  in  either  the  immediate  or  distant  future. 

(2)  As  to  the  contention  of  the  Government  that  the  gift  was 
one  to  take  effect  after  the  donor's  death,  the  court  held  that  this 
contention  was  based  upon  the  theory  that  the  decedent  maintained 
the  household  and  the  securities  were  to  be  used  to  pay  his  own 
indebtedness.  The  court  concluded  on  this  point,  however,  that  the 
gift  was  not  in  the  nature  of  a  reservation  of  income  from  the  bonds 
to  his  own  uses  since  the  gift  was  absolute,  unaccompanied  by  any 
conditions  or  reservations.  The  wife  testified  that  there  was  no  un- 
derstanding that  the  income  from  the  bonds  should  be  used  in  any 
particular  way. 

(3)  As  to  the  third  contention  of  the  Government,  the  law 
clearly  is  that  unless  the  tax  is  paid  under  duress  or  compulsion  and 
under  protest  made  at  the  time  of  payment  there  can  be  no  recovery, 
but  in  this  case,  the  amount  erroneously  paid,  as  shown  in  the  origi- 


1004  545  U.  S.  TAX  CASES 

nal  return,  was  not  a  voluntary  payment  of  the  tax  on  the  bonds. 
The  deputy  commissioner's  review  and  audit  shows  the  amount  to 
have  been  a  reduction  from  the  estate  tax  payment  and  it  is  not 
understood  by  what  right  he  applied  it  to  payment  of  taxes  on 
bonds  not  specified  in  the  original  return.  His  disposition  in  this 
relation  was  unauthorized,  arbitrary  and  coercive.  '  *  It  may  be  that 
if  the  Government  had  not  made  a  reduction  on  account  of  the 
bequest  to  the  library  at  Geneseo,  the  payment  by  plaintiffs  under 
their  original  return  without  demand,  would  be  held  a  voluntary 
payment  and  recovery  barred,  but  the  amount  retained  and  irregu- 
larly applied  without  the  consent  of  the  plaintiffs  and  under  their 
protest  when  they  paid  the  tax  exacted  does  not  come  under  the 
principle  of  the  adjudication  cited  in  defendant 's  brief. ' ' 

"The  plaintiff  in  my  opinion  is  entitled  to  judgment  against 
the  United  States  Internal  Revenue  Collector  for  a  return  of  the 
tax  illegally  assessed  on  the  bonds  in  question  and  paid  by  the  plain- 
tiffs under  protest. '  * 

WARDELL,  COLLECTOR  v.  BLUM  et  al. 

(U.  S.  Circuit  Court  of  Appeals,  Ninth  Cir.,  Oct.  24,  1921) 
(276  Fed.  226) 

Record :  Revenue  Act  of  1916.  Action  at  law  to  recover  the 
amount  of  a  federal  estate  tax  paid  under  protest.  In  error  to  the 
District  Court  which  entered  a  judgment  overruling  demurrer  to 
complaint.  For  same  case  below  see  270  Fed.  309,  ante  97.  Affirmed. 

Facts :  This  suit  was  brought  for  the  recovery  of  an  estate  tax 
paid  to  the  Government  under  protest  on  the  half-interest  of  the 
wife  of  the  decedent  Blum  in  the  community  property  which  passed 
to  her  under  the  laws  of  the  State  of  California  upon  the  death  of 
her  husband. 

Question:  Was  the  half  of  the  community  property  which 
passed  to  the  wife  upon  the  death  of  the  decedent  part  of  the  net 
estate  of  the  decedent  and  so  subject  to  the  federal  estate  tax? 

Decision :  The  court  points  out  that  in  the  case  entitled  In  re 
Moffitt's  Estate,  153  Cal.  359,  the  Supreme  Court  of  California  held 
that  the  share  of  the  surviving  wife  in  the  community  property  was 


545  U.  S.  TAX  CASES  1005 

subject  to  the  inheritance  tax  imposed  by  the  statute  of  the  state, 
citing  a  number  of  decisions  to  the  effect  that  upon  the  death  of  her 
husband  the  wife  took  one-half  of  the  community  property  only  as 
"heir"  of  her  husband.  However,  in  1917  (Stat.  1917,  p.  880)  the 
California  legislature  so  changed  its  inheritance  tax  law  as  to 
expressly  declare  that  for  the  purposes  of  the  act  the  half  of  the 
community  property  which  goes  to  the  widow  on  the  death  of  the 
husband,  shall  "not"  be  deemed  to  pass  to  her  as  "heir"  of  her 
husband,  but,  shall  go  to  her  as  and  for  a  valuable  and  adequate  con- 
sideration, and  shall  not  be  subject  to  the  inheritance  law  of  the 
state. 

The  statute  of  the  United  States  imposes  an  inheritance  tax 
upon  the  transfer  of  the  net  estate  of  every  decedent  "to  the  extent 
of  the  interest  therein  of  the  decedent  at  the  time  of  his  death,  which 
after  his  death  is  subject  to  the  payment  of  the  charges  against  his 
estate  and  the  expenses  of  its  administration  and  is  subject  to  dis- 
tribution as  part  of  his  estate. ' '  Such  interest  must  be  determined 
by  the  law  of  the  state  where  the  property  is  situate.  "In  the  pres- 
ent instance  the  law  of  that  state  is  declared  by  the  statute  enacted 
in  1917,  providing  that  so  far  as  state  inheritance  taxes  are  con- 
cerned, the  wife  of  a  decedent  acquired  upon  his  death  one-half  of 
the  community  property  in  her  own  right,  and  not  as  heir  of  her  hus- 
band ;  in  effect,  therefore,  that  insofar  as  state  inheritance  taxes  are 
concerned,  the  estate  of  a  decedent  has  no  interest  of  any  sort  in  the 
wife's  half  of  the  community  property.  That,  in  our  opinion,  set- 
tles the  question  here  presented  against  the  contention  of  the 
government ;  for  we  not  only  see  nothing  in  the  above  quoted  pro- 
vision of  the  United  States  statute  to  indicate  any  intention  to 
impose  a  federal  inheritance  tax  upon  the  wife 's  half  of  community 
property  which  the  statute  of  the  state  where  the  property  is  situate 
expressly  declares  passes  to  the  wife  upon  the  death  of  her  husband 
in  her  own  right  and  not  as  his  heir,  but  the  federal  statute,  as  will 
be  seen,  expressly  declares  as  one  of  the  essential  conditions  to  the 
imposition  of  a  federal  inheritance  tax  that  the  net  estate  of  the 
decedent  shall  be  *  subject  to  distribution  as  his  estate. '  ' ' 

Even  if  the  case  were  not  controlled  by  the  California  statute  of 
1917,  applying  to  it  the  rule  of  law  announced  by  the  Supreme 


1006  545  U.  S.  TAX  CASES 

Court  of  the  United  States  in  the  case  of  Arndt  v.  Reade,  220  U.  S. 
311,  320,  to  the  effect  that  the  wife  has  a  greater  interest  in  com- 
munity property  than  the  mere  possibility  of  an  expectant  heir,  the 
result  would  be  the  same,  since  under  that  rule  one-half  of  the  com- 
munity property  would  go  to  the  surviving  wife,  the  other  half 
being  subject  to  the  testamentary  disposition  of  the  husband  by  vir- 
tue of  Section  1402  of  the  Civil  Code  of  California. 
Hunt,  Circuit  Judge,  dissenting. 

WASSEL  V.  LEDERER,  COLLECTOR 

(U.  S.  District  Court,  E.  D.  Penn.,  July  19,  1921) 
(274  Fed.  489) 

Record:  National  Prohibition  Act  and  R.  S.  Sec.  3224.  In 
equity.  Suit  to  restrain  the  levy  of  a  tax  under  section  35  of  the 
National  Prohibition  Act.  On  motion  to  discuss  bill.  Motion 
granted. 

Facts:  "The  purpose  of  the  bill  is  stated  and  the  real  cause 
of  action  implied  by  the  averment  of  paragraph  3 :  *  That  this  suit 
is  instituted  to  prevent'  the  'collector  of  internal  revenue  from 
collecting  and  attempting  to  collect  from  the  plaintiff  internal  reve- 
nue tax  levied  under  and  by  virtue  of  the  act  of  Congress  of  October 
28,  1919.'  " 

Question:  Granting  that  the  court  has  no  power  to  restrain 
collection  of  a  tax,  because  of  the  provisions  of  R.  S.  3224,  will  a 
Federal  trial  court  make  a  finding  that  an  exaction  called  by  Con- 
gress a  tax  is  in  fact  a  penalty,  the  enforcement  of  which  may  be 
enjoined  under  appropriate  circumstances? 

Decision:  "Congress  has  called  the  payment  imposed  a  tax, 
and  has  directed  it  to  be  levied  and  collected  as  such.  It  is,  as  we 
view  it,  beyond  the  province  of  a  trial  court  to  make  the  finding 
that  Congress  is  not  exercising  the  power  which  it  declares  itself 
to  be  exercising,  but  another  power  which  it  does  not  lawfully  pos- 
sess. ♦  *  •  The  view  we  take,  however,  is  that  it  is  the  orderly 
and  preferred  mode  of  judicial  procedure  to  leave  to  a  court  of  final 
jurisdiction  the  duty  and  responsibility  of  finding  the  fact  upon 
which  the  distinction  made  rests. ' ' 


545  U.  S.  TAX  CASES  1007 

"We  accordingly  refuse  to  make  the  finding  that  the  tax  im- 
posed is  not  a  tax,  and  this  carries  the  consequence  that  the  bill  of 
complaint  be  dismissed." 

WEAVER,  COLLECTOR  v.  EWERS 

(Circuit  Court  of  Appeals,  Eighth  Cir.,  Feb.  29,  1912) 
(195  Fed.  247) 

Record:  R.  S.  Sec.  3226.  Action  to  recover  tax  paid  under 
protest.  Judgment  for  plaintiff  (182  Fed.  173),  and  defendant 
brings  error.    Affirmed. 

Facts:  The  tax  in  question,  together  with  a  penalty,  was 
assessed  against  the  plaintiff  as  a  wholesale  dealer  in  oleomargarine. 
After  the  assessment  of  the  same  the  plaintiff  filed  with  the  Com- 
missioner an  application  for  review  and  abatement.  Subsequently 
the  Commissioner  overruled  the  application  and  refused  to  abate 
the  tax.  The  plaintiff  then  paid  the  assessment  under  protest  and 
brought  this  suit. 

Question :  Does  R.  S.  Sec.  3226  require  a  taxpayer,  who  has 
paid  a  tax  under  protest  and  after  claim  for  abatement  of  same  has 
been  filed  and  disallowed  by  the  Commissioner,  to  make  a  further 
appeal  to  the  Commissioner  before  he  is  entitled  to  institute  suit 
for  recovery  of  the  tax? 

Decision:  "Notwithstanding,  however,  the  provision  of  sec- 
tion 3226  above  mentioned,  that  no  suit  shall  be  maintained  in  any 
court  for  the  recovery  of  any  internal  tax  alleged  to  have  been 
erroneously  or  illegally  assessed  or  collected,  or  any  penalty  claimed 
to  have  been  collected  without  authority,  or  any  sum  alleged  to 
have  been  excessive  or  in  any  manner  wrongfully  collected,  until 
an  appeal  shall  have  been  duly  made  to  the  Commissioner  of  In- 
ternal Revenue  according  to  the  provisions  of  the  regulations  of  the 
Secretary  of  the  Treasury  established  in  pursuance  thereof,  and  a 
decision  of  the  Commissioner  has  been  had  therein,  we  are  of  the 
opinion  that,  as  the  law  does  not  require  idle  acts,  the  first  ground 
of  demurrer  must  be  overruled,  as  the  purpose  and  requirement  of 
the  statute  above  quoted  has  been  fully  met  by  the  application  for 
review  of  the  assessment  made  to  the  Commissioner  of  Internal 


1008  545  U.  S.  TAX  CASES 

Revenue  as  set  out  in  the  petition.  What  the  Commissioner  of  In- 
ternal Eevenue  thought  about  the  assessment  had  been  obtained 
upon  full  statement  of  the  facts,  and  it  would  have  been  a  useless 
form  again,  after  the  tax  was  paid,  to  appeal  to  the  Commissioner 
and  obtain  the  same  judgment.  The  reason  for  the  appeal  did  not 
exist,  and  hence  the  appeal  after  tax  was  paid  was  not  necessary. ' ' 

THE  WESTERN  UNION  TELEGRAPH  COMPANY  v.  THE 
DELAWARE,  LACKAWANA,  etc.,  RAILROAD  COMPANY 

(U.  S.  District  Court,  S.  D.  of  N.  Y.,  June  5,  1922) 
(Not  yet  reported) 

Record:  Revenue  Act  of  1918.  Action  by  Western  Union 
Telegraph  Company  to  recover  $4,530.70  which  it  paid  to  the  Gov- 
ernment as  a  tax  upon  50,098  messages  transmitted  by  it  for  the 
defendant  railroad  company  under  a  certain  contract.  Judgment 
for  the  plaintiff. 

Facts:  This  was  a  friendly  suit  brought  by  the  respective 
parties  to  test  the  validity  of  Article  9  of  Regulations  57  promul- 
gated under  the  provisions  of  Section  500  (f)  and  501  (a)  (c)  of 
the  Revenue  Act  of  1918.  On  July  1,  1905,  the  telegraph  company 
and  the  railroad  company  entered  into  a  contract  for  the  mutual 
exchange  of  services  free  of  charge  in  the  transmission  of  telegraph 
messages.  Under  the  provisions  of  Article  9  of  Regulations  57,  such 
messages  were  subject  to  the  tax  imposed  by  Section  500  (f )  of 
the  Act,  computed  upon  the  amount  of  the  regular  established 
charge  for  the  transmission  of  similar  messages  for  ordinary  cus- 
tomers, calculated  at  the  regular  fixed  rate  provided  in  the  tariff 
of  the  transmitting  carrier.  The  tax  on  these  messages  was  paid 
by  the  Western  Union  Company  to  the  Government  and  this  suit 
instituted  against  the  defendant  on  its  contract  to  recover  the 
amount  thereof.  The  Government  was  informed  of  the  suit  but 
the  Commissioner  of  Internal  Revenue  considered  it  inadvisable  to 
take  any  part  in  this  litigation  until  expressly  requested  by  the 
court  to  file  a  brief  as  amicus  curiae. 

Questions :  (1)  Can  the  validity  of  the  regulations,  and  hence 
of  the  tax,  be  questioned  in  a  collateral  proceeding  of  this  character! 


545  U.  S.  TAX  CASES  1009 

(2)  Were  the  regulations  promulgated  by  the  Commissioner 
under  which  the  tax  was  computed  upon  the  amount  of  the  regu- 
larly established  charge  for  the  messages  justified  by  the  statute? 

Decision:  (1)  The  court  first  points  out  that  if  the  telegraph 
company  had  refused  to  send  the  messages  before  receiving  the  tax 
or  an  agreement  of  indemnity  of  some  sort,  and  the  railroad  com- 
pany had  then  sought  to  enjoin  the  attempted  collection  of  the  tax 
by  the  telegraph  company  it  probably  could  have  succeeded  in  hav- 
ing the  legality  of  the  tax  tested  in  advance  on  the  authority  of 
Pollock  V.  Farmers  Loan  and  Trust  Co.,  157  U.  S.  429 ;  Brushaber 
V.  Union  Pacific  R.  E.  Co.,  240  U.  S.  1;  Hill  v.  Wallace,  U.  S. 
Supreme  Court,  May  15,  1922,  notwithstanding  the  provisions  of 
Sec.  3222  R.  S.  "But  the  usual  channels  provided  by  Congress 
for  testing  the  legality  of  taxing  measures  are  normally  exclusive, 
and  recourse  is  not  to  be  had  to  other  channels,  unless  necessary  to 
prevent  irreparable  injury  and  great  confusion.  No  such  emer- 
gency exists  in  the  instant  case."  No  good  reason  exists  why  a 
refund  should  not  be  sought  and,  if  refused,  a  suit  instituted. 

"If  as  a  practical  matter  the  telegraph  company  was  obliged 
under  color  of  law  to  pay  the  alleged  tax,  and  no  steps  to  enjoin 
such  collection  were  taken  by  the  railroad  company  or  the  telegraph 
company,  it  would  seem  that  the  burden  of  the  payment  and  of  the 
contest  of  the  legality  of  the  tax,  if  there  is  to  be  any,  ought  to  fall 
upon  the  party  who  under  the  Act  was  supposed  -to  pay  the  tax. 

*  *  *  It  seems  to  me  that  in  the  circumstances  of  the  instant 
case  the  railroad  company  had  no  more  right  to  question  this  pay- 
ment made  for  its  account  by  the  telegraph  company  under  color 
of  law  than  a  principal  would  have  to  question  a  payment  reason- 
ably and  in  good  faith  made  by  his  agent  in  the  course  of  his  duties. 

*  *  ,  •  The  tax  was  paid  under  color  of  law  and  should  in  con- 
sequence as  between  the  parties  be  borne  by  the  railroad  company. 
The  parties  can  not  by  their  own  agreement  change  the  method 
provided  by  Congress  for  testing  the  validity  of  tax  legislation." 

*  *  It  is  unnecessary  to  expand  upon  the  unwisdom  and  impolicy 
of  passing  upon  the  legality  of  important  taxing  measures  in  a  col- 
lateral proceeding  of  this  character,  to  which  the  Government  is 


1010  545  U.  S.  TAX  CASES 

not  a  party  and  of  which,  because  of  the  possible  collateral  issues 
involved,  the  Treasury  may  have  as  was  apparent  by  the  case  here 
before  the  court  intervened,  an  insufficient  understanding.  In  the 
Pollock,  Brushaber,  and  Hill  cases,  the  tax  had  not  been  collected, 
and  to  prevent  great  confusion  and  irreparable  damage  the  Court 
entertained  jurisdiction;  the  instant  case,  as  we  have  seen,  pre- 
sents no  such  necessity  for  preventitive  justice." 

(2)  "But  if  I  should  err  in  my  judgment  that  it  is  unneces- 
sary for  me  to  consider  in  this  suit  whether  or  not  it  was  within 
the  lawful  authority  of  the  Commissioner  of  Internal  Revenue  by 
regulation  to  apply  the  tax  provided  in  Section  500  (f )  of  the  Reve- 
nue Act  of  1918,  to  contracts  for  the  exchange  of  services,  I  should 
not  hesitate  to  uphold  the  regulation  in  the  absence  of  evidence 
of  its  unreasonableness.  •  *  *  The  Revenue  Act  provides  that 
the  taxes  shall  apply  to  all  services  rendered  for  hire.  Giving  rea- 
sonable scope  to  the  legislative  intent,  the  Act,  in  my  judgment,  must 
be  construed  to  cover  all  messages  transmitted  for  an  economic  con- 
sideration,— money  or  money's  worth.  It  is  difficult  under  a  sound 
taxing  policy  to  find  a  basis  for  differentiation  between  exchanges 
and  cash-paid  services.  •  •  •  True,  there  might  be  some  diffi- 
culty in  working  out  the  valuation  to  be  placed  upon  messages 
transmitted  under  exchange  of  service  agreements,  but  the  admin- 
istration of  the  Act  is  vested  in  the  Commissioner  of  Internal  Reve- 
nue, who  is  empowered  to  issue  regulations  necessary  and  proper 
to  carry  into  effect  the  general  provisions  of  the  law.  •  •  •  In 
cases  of  this  kind,  administrative  rulings  made  by  the  Department 
after  careful  consideration  of  the  problem  as  it  affects  the  country 
as  a  whole  ought  not  lightly  to  be  disturbed  by  the  Court. ' ' 

IN  RE  WILLIAMS  OIL  CORPORATION 

(U.  S.  District  Court,  W.  D.  Kentucky,  April  24,  1920) 
(265  Fed.  401) 

Record:  Section  64a,  Bankruptcy  Act.  On  petition  for  re- 
view of  ruling  of  referee.    Ruling  reversed,  with  directions. 

Facts :  The  adjudication  in  bankruptcy  was  made  on  Decem- 
ber 19, 1919.    On  January  14,  1920,  the  Collector  of  Internal  Reve- 


545  U.  S.  TAX  CASES  1011 

nue  filed  proof  of  claim  of  the  United  States  for  income  taxes 
alleged  to  be  due  from  the  bankrupt.  This  claim  was  allowed. 
On  January  20,  1920,  the  trustee  in  bankruptcy  filed  a  petition 
praying  for  a  re-examination  of  the  claim  thus  presented  by  the 
United  States.  On  February  4,  1920,  the  Collector  of  Internal 
Eevenue  moved  to  dismiss  the  trustee 's  petition  for  re-examination. 
On  March  19,  1920,  the  referee  sustained  that  motion,  and  this  peti- 
tion, asking  a  review  of  that  order,  was  thereupon  filed  in  due 
course. 

Questions:  (1)  May  a  trustee  in  bankruptcy  resist  a  tax 
claimed  to  be  due  by  the  United  States,  and  have  the  accuracy  or 
;^tice  of  the  claim  therefor  determined  by  the  bankruptcy  court 
instead  of  paying  the  tax  and  filing  claim  for  refund  t 

(2)  "Would  regulations  made  by  the  Commissioner  of  Internal 
Revenue  have  the  effect  of  nullifying  the  statute  authorizing  the 
bankruptcy  court  to  determine  questions  as  to  the  amount  of  legal- 
ity of  any  tax  due  and  owing  by  the  bankrupt  1 

Decision :  (1)  "  It  seems  to  the  court  to  be  entirely  obvious  that 
it  was  the  purpose  of  Section  64a  to  have  such  matters  as  are  therein 
referred  to  settled  promptly  in  the  bankruptcy  proceeding  itself. 
*  *  *  The  referee  concluded  that  the  bankruptcy  court  had  no 
jurisdiction  to  do  this.  We  think  this  conclusion  of  the  referee  was 
erroneous,  and  the  order  sought  to  be  reviewed  will  therefore  be 
reversed,  with  directions  to  re-examine  the  claim  on  behalf  of  the 
United  States,  and  ascertain  the  correct  amount  due  thereon.  Of 
course  it  is  obvious  that  this  opinion  in  no  way  passes  upon  any 
question  of  law  or  of  fact  that  may  be  raised  in  the  further  pro- 
ceedings in  this  court,  either  before  the  referee  or  here.  All  we 
decide  is  that  under  Section  64a  the  court  has  the  power,  and  it 
is  its  duty  to  examine  into  any  question  which  may  arise  as  to  the 
amount  or  legality  of  the  taxation  claimed — that  being  precisely 
what  Section  64a  authorizes  the  bankruptcy  court  to  do." 

(2)  "It  is  altogether  true  that  the  Revenue  Act  does,  and 
properly  does,  authorize  generally  the  making  of  regulations  by 
the  Commissioner ;  but  the  Commissioner  is  not  given  authority  by 
a  regulation  to  nullify  or  in  any  way  to  interfere  with  statutory  pro- 
visions respecting  other  matters,  such  as  Section  64a. ' ' 


Pages  1013  to  1087  have  been 
omitted  In  this  fourth  edition  printed 
November,  1924,  because  they  have 
been  superseded  by  a  Revised  Table 
of  Cases  and  Revised  Index  printed 
in  the  Second  Supplement  off  the 
press  December,  1924. 

The  Revised  Table  of  Cases  and 
Revised  Index  cover  three  volumes 
of  United  States  Tax  Cases. 


LAW  LmRARY 

tJKlVERSITY  OF  CALIFORNIA 

LOS  ANGELES 


UC  SOUTHERN  REGIONAL  LIBRARY  FACILITY 

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